Mergers and acquisitions (M&A) deals create a cascade of new considerations for boards, and in many deals, talent retention and executive compensation are some of the most important factors to get right. Companies across industries—especially in the tech and biotech space—view their people as their top asset.

A strong management team is critical to a company’s value and performance and incentivizing employees and treating them fairly are essential ingredients in the transaction’s success. Boards need to pay particular attention to compensation before, during, and after a deal closes to ensure that all-star talent stays in place.

At the same time, boards face increasing hurdles when it comes to executive pay. Last year’s M&A boom, combined with labor-demand pressures due to the Great Resignation, and the normalization of remote work broadening executives’ opportunities, gave management teams more negotiating power when it came to compensation.

Executive pay is also a topic that is often thrust into the limelight. Employees, media, investors, and other stakeholders have increasingly scrutinized pay equity in organizations, and companies open themselves up to real reputational risks if pay is deemed unfair. Some public companies have faced challenges in getting shareholder support in the advisory “say on pay” votes, and other shareholder proposals related to pay are on the rise. From a regulatory perspective, the US Securities and Exchange Commission requires robust executive compensation disclosure for public companies, and certain states and cities (such as Portland, Oregon and San Francisco, California) have tax penalties related to executive pay ratios.

Complicating things further, the current economic environment is in a state of uncertainty. The first quarter of 2022 saw another surge of coronavirus cases, a tougher regulatory environment, and a new war in Ukraine, leading to market volatility and a slowdown in dealmaking. Interest rates, while still low, are rising, and high inflation is impacting consumers.

All in all, there is a perfect storm of factors making compensation committees’ oversight of executive pay more complex and nuanced than ever, especially when companies are pursuing a deal. Boards need to evaluate whether compensation packages and retention arrangements are appropriate to hold on to a company’s executive talent, if that is a key goal, while balancing stakeholder interests and market pressures.

Before, during, and after a deal, board compensation committees for both acquirers and target companies should consider doing the following:

Ensuring seamless cultural integration. Cultural integration is a crucial ingredient to ensuring that a new, combined company thrives after the deal is done. From an executive pay standpoint, compensation committees must ensure that strategic incentive metrics are appropriate to the new company’s specific business model and culture.

Connecting strategic metrics to overall strategy. Recent pushes to tie diversity, equity, and inclusion (DE&I) and environmental, social, and governance (ESG) issues to executive pay are ramping up, but there is no one-size-fits-all model, and companies need to carefully consider whether and how to implement metrics. Any such metrics should be developed in consideration of the company’s overall DE&I and ESG strategies. Board members and management teams should consider their vision for where the new company stands on DE&I issues, as well as a holistic ESG strategy, to begin effectively tying compensation to these commitments.

Balancing the need for retention with other factors. Compensation packages and retention agreements should be generous enough to incentivize management team members to successfully guide the new, combined company after a deal closes. But compensation decisions should also consider the input of the full spectrum of stakeholders, including shareholders, investors, employees, customers, and suppliers. In these circumstances, investor outreach efforts can be helpful.

Integrating human capital management (HCM) into business strategy and, in turn, executive pay. In recent years, board mandates have expanded into issues related to talent and HCM, which involves taking a closer look at areas that may have historically been seen as human resources duties, such as recruiting, training, and performance planning, to uncover new opportunities to drive employee engagement and business value. As boards continue to get familiar with HCM, they can add value by taking into consideration how HCM ties to the new, combined company’s business strategy and how to integrate HCM into incentives in compensation plans.

Evaluating how inflation and market volatility may impact executive pay. Market volatility and an uncertain economy can impact compensation awards that have financial performance targets. Because changes in market conditions can lead to significant fluctuations in company performance and stock price, performance-based incentive goals may be seen as less certain and equity grants as less incentivizing. Additionally, executives may be expecting increased base salary amounts at rates higher than we would ordinarily see in a given year. While it is impossible to know how long market turbulence will last, the overall state of the economy is always an important consideration in all compensation decisions.

Executive compensation is rarely a simple formula, and the stakes are high to get it right—especially in M&A. But with their nuanced understanding of a company, its management team, and the market at large, boards are in an excellent position to use compensation as a valuable tool for guiding their organizations to long-term success.

Jean McLoughlin is partner and cochair of the executive compensation group at Paul, Weiss, Rifkind, Wharton & Garrison.

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