Pub. 7 2017-2018 Issue 4

8 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Compensation Issues That Can Determine the Success of Your Acquisition BY KRISTEN KOSTNER, SENIOR CONSULTANT AND MATT BREI, PRESIDENT BLANCHARD CONSULTING M ergers and acquisitions continue to be an important busi- ness strategy for many community and regional banks. The compensation areas that receive the most attention are change-in-control (CIC) related severance payments and the equity holdings that typically increase in value upon the change. The CIC severance payments that are covered under employment and severance agreements are often estimated and are frequently a part of the conversation prior to the actual CIC. Equity and deferred compensation programs that have accelerated vesting upon a CIC are also generally reviewed ahead of time. The executive groups that have these compensation programs get plenty of attention from the key parties involved in a transaction. However, there are also many non-executive related compensation issues that can have a big impact on the ultimate success of a merger or acquisition. Once the transaction is complete and the executive related com- pensation payouts have been settled, there is a combined organization that needs to operate successfully. It is possible that the two orga- nizations had significantly different compensation philoso - phies in place and one of the key first steps is to clearly identify and communicate the compensation philosophy of the merged bank going forward. For example, if one organization believes in leading the market and the other likes to “lag” the market on pay, you’ll need to determine the future direction. A strong com- pensation philosophy that guides the compensation decisions and clearly communicates the preferences of the organization will help accelerate the pace of the transition. Additionally, the combined organizationwill need to determine the appropriate market benchmarking data to utilize. The bank is now larger following the transaction and this creates a situation where new peers may be appropriate and new benchmarking surveys or data cuts may be necessary. The bank may have expanded into new states and/or regional markets, which impacts the external market bench- marking process. It is critical to identify the appro- priate market data to use for external benchmarking and market competitiveness. Another potential challenge after an acquisition is the possible need to combine and/or intro- duce formal salary grade structures. If both organizations had a salary structure system in place there will need to be a determination on whether adjustments need to be made to the future structure. If one organization did not have any salary grades in place, then theywill likely need to be introduced to the concept. It can take some time to educate managers and employees as to how these salary systems work. The bank should have a non-discriminatory, market competitive, easily manageable and communicated salary structure to use. Another common challenge is the realization that the actual pay ranges for certain posi- tions within the combined organization are significantly different. This could be attributed to the differing compensation philosophies of the organizations, differingmarket locations and compet - itiveness, or simply differing pay practices that have developed over time. The first step to resolving these potential issues is to review the various positions and identify the significant pay differentials that exist. After identification, the challenge is to assess why the differences have occurred and if there isn’t a clear reason—for example, a geographical differential like a rural versus urban location--then the tough part becomes what to do about these internal pay differ - ences. For example, should the pay grade be changed and/or different levels created for a job title?