SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS RETAINING THE RIGHT TALENT FOR DEAL SUCCESS

Transcription

1 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS RETAINING THE RIGHT TALENT FOR DEAL SUCCESS

2 Contents CONTENTS 1. Introduction Methodology... 2 I. Survey Design... 2 II. Data Analysis and Reporting... 2 III. Survey Usage Retention Programs... 4 I. Eligibility and Participation... 4 II. Individual Award Levels... 6 III. Conditions for Payment... 8 IV. Timing of Payout V. Number of Payments VI. Payout Vehicles VII. Overall Program Cost Transaction Bonus Programs I. Eligibility and Participation II. Individual Award Levels III. Conditions for Payment IV. Number of Payments V. Payout Vehicles VI. Overall Program Cost Designing Your Retention Bonus Program I. Examine Whether a Retention Plan Is Critical To Deal Success II. Evaluate The Population For a Strategic Retention Program III. Determine the Award Sizes for Retention Program Participants IV. Clarify Conditions for Payment: Pay-for-Stay Or Pay-for-Performance? Participant Profile I II. Participant List III. Geography IV. Industry V. Size and Capitalization i 2012 Mercer LLC.

3 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 1 INTRODUCTION 2

4 Introduction 1 Introduction For many organizations around the world, M&A activities represent tremendous investments of capital and time and have become vital strategies for growth and competitiveness. As M&A has become a priority for many companies, the ability to successfully retain critical talent has become a significant determinant of overall deal (and company) success. Simply put, according to one of the participants in this survey retention is a critical aspect of the deal Retention of key talent, however, can be challenged by the perceived impact of the transaction on job security and career prospects, and can distract even the most highly valued and critical talent. Companies that are successful at retaining critical talent and at M&A in general make the connection between the objective of the deal and talent strategy. These organizations understand that human capital is critical to achieving deal synergies and that the loss of key talent could be detrimental. An important tool that many successful companies use is retention incentives. To better understand the retention incentives that companies utilize to help retain critical talent, Mercer gathered in-depth information from 42 companies across the world. The research focuses on common questions facing organizations in situations where talent retention is a concern, including: Is there a need for a retention incentive plan? Who should participate and how should award size be determined? What should be the timing and structure of the plan? How much should the overall plan cost? Survey results reflect detailed information on the retention plans used in over 70 deals of various types that participants closed in the past three years. As this study illustrates, retention plan design varies by deal, and is determined based on many factors including the type of deal (e.g., merger, acquisition, divestiture), the deal objective and the impact of the deal retention strategy, we look at the type of deal and then assess the skills of the people in the deal. Our approach to retention is both people-driven and deal- In a merger that results in redundancies due to overlapping capabilities across the two organizations, the focus may be on retaining those employees critical to integration only. In an acquisition of a start-up, the focus may be on retaining entrepreneurs who have critical skills. than over the long-term. In an acquisition of a smaller rival, the focus may be on retaining customers and a smaller group of key talent. In addition to data on retention plans, we also gathered information from survey participants on transaction bonuses designed to reward employees for the incremental work they undertake during a transaction. Similar to retention incentives, we find that transaction bonuses are also tailored to the specifics of the deal and the team members involved Mercer LLC.

5 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 2 METHODOLOGY 3

6 Methodology 2 Methodology I. Survey Design To deliver comprehensive data on M&A retention and transaction practices, this survey was designed to cover the most important aspects of these programs and the companies that implemented them. The survey covered three main topics: Participant Profile To assess retention programs in the proper light, it is necessary to understand the companies that implement them. We gathered information on company size, industry, location and M&A activity. Typical Structures We asked survey participants to answer questions on their typical retention and transaction incentive designs (if they have one). We find that often companies have a typical design that they use for most deals, and customize the design for the specific needs of an individual deal. This gives valuable insights on how companies approach and think about retention. Recent Transaction Data We collected in-depth data from each participant on three M&A transactions completed within the past three years for which a retention and/or transaction program was implemented. By also collecting data on the size of the deal, the type of transaction and the industry of the target, we are able to identify trends and patterns of how retention programs differ for each unique situation. II. Data Analysis and Reporting To deliver the insights contained in this survey report, data is analyzed in the following categories: In aggregate form By country / region By type of deal (acquisition vs. divestiture) By deal size In addition to the data gathered, Mercer consultants also conducted interviews with eight of the larger survey participants to gather more information on the thinking and approach around retention, and how retention fits into organizations overall human capital and talent management strategies. Insights from these interviews are contained throughout this report. A few survey reporting notes: Percentages in columns may not add to 100 percent when organizations are given the option to provide more than one response to a specific question Mercer LLC.

7 Methodology For all questions that provide a percentage response, the percentage was calculated based on the number of organizations that responded to each question and not the total number of survey respondents. Mercer reminds readers to exercise caution in drawing definitive conclusions on data where sample sizes are small (e.g., fewer than 10 organizations). This could potentially represent an insufficient sample size and not be an accurate reflection of the marketplace. All dollar amounts ($) are denoted in US Dollars. Any values reported in foreign currencies have been converted to USD using the applicable exchange rates. To protect the confidentiality of survey participants and to ensure quality data, no statistics are shown for sample sizes of less than four. Percentiles are shown for sample sizes of five or larger. III. Survey Usage The information and data contained in this report are for information purposes only and are not intended nor implied to be a substitute for professional advice. In no event will Mercer be liable to you or to any third party for any decision made or action taken in reliance of the results obtained through the use of the information and/or data contained or provided herein Mercer LLC.

8 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 3 RETENTION PROGRAMS 4

9 Retention Programs 3 Retention Programs The use of retention incentives is selective and depends primarily on the type of deal. Among all deals completed by participants over the past three years, 62% include retention programs. Retention is not related to the value of the deal, but to the value of the people. Survey participant I. Eligibility and Participation Participants report that they typically determine whether a retention program is necessary early in the due diligence process. However, eligibility is not usually determined until the deal approaches close. Our M&A team, HR team and business team work together to determine eligibility for the retention bonus. Survey participant Retention plans target executives, senior management and those critical to integration Retention programs are primarily focused on retaining executive and senior management talent (key for long-term value creation and continuity) or employees critical to integration, such as those in finance and accounting roles. Few companies offer retention incentives to employees outside these groups. Concerns about the long-term success of the deal drive retention strategy While just over half of companies (53%) provide retention incentives to employees critical in the short-term for integration, 70% provide incentives to executives critical to long-term success and 69% to senior management. Retention Bonus Eligibility % of Companies Providing Retention Incentives, by Employee Group 80% 70% 60% 50% 40% 30% 20% 10% 0% 70% Executives critical for long-term success 69% 53% Senior Management Employees critical in short-term for integration 14% Other employees Mercer LLC.

10 Retention Programs Buyers are more likely than sellers to provide retention incentives Companies are more likely to provide retention incentives when involved in an acquisition than a divestiture. For example, when describing their typical retention program structure during an acquisition, 57% of participants say executives critical to long-term success are always eligible for retention incentives. For a typical divestiture, however, only 44% say these executives are always eligible. In addition to bonuses, leadership interaction and a well designed change management strategy are critical to retention. When we want to retain key talent, we look closely at what is being communicated to them. Survey participant 60% 50% 40% 30% 20% 10% 0% % of Employee Group Always Eligible for Retention Incentives For Typical Structures, by Deal Type 57% 44% Executives critical for longterm success 29% Senior Management 33% 25% 24% Employees critical in short-term for integration Acquisitions Divestitures Retention bonuses are more common in cross-border transactions Retention programs are more commonly implemented for all employee groups when the transaction is cross-border. This reflects the fact that acquiring firms tend to be more cautious when the target is outside their home market and thus are more likely to implement retention programs in order to retain to key talent. 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Retention Bonus Eligibility Cross Border Transactions % of Companies Providing Retention Incentives, by Employee Group 80% 80% Executives critical for long-term success Senior Management 60% Employees critical in short-term for integration 4% Other employees Mercer LLC.

11 Retention Programs II. Individual Award Levels Retention incentives are typically determined as a percentage of base salary and vary significantly based on factors such as the employee s level in the organization and whether the deal is an acquisition or divestiture. Our data also show that the country in which the deal takes place and the company s industry also impact award levels. Our retention strategy is based on our findings during due diligence. We use a formal approach to determine dollar payments. In setting amounts, we consider the disruption of day-to-day work. Survey participant Retention Bonus as % Base Salary 25th %ile Median 75th %ile N= Executives critical for long-term success 25% 75% 130% 52 Senior Management 25% 45% 95% 50 Employees critical in short-term for integration 15% 25% 45% 37 Other Employees 15% 25% 60% Mercer LLC.

12 Retention Programs Region matters Among participants, U.S. and Canadian companies provide larger retention incentives than European and Asia/Pacific (APAC) companies when viewed as a percentage of base pay. Retention Bonus as % Base Salary By Country / Region United States 25th %ile Median 75th %ile N= Executives critical for long-term success 35% 95% 130% 29 Senior Management 25% 55% 103% 27 Employees critical in short-term for integration 15% 30% 55% 24 Other Employees 18% 25% 73% 10 Canada 25th %ile Median 75th %ile N= Executives critical for long-term success 25% 75% 130% 9 Senior Management 25% 45% 130% 9 Employees critical in short-term for integration - 25% - 4 Other Employees Europe 25th %ile Median 75th %ile N= Executives critical for long-term success 5% 25% 95% 8 Senior Management 5% 35% 73% 8 Employees critical in short-term for integration 5% 25% 50% 7 Other Employees Asia Pacific 25th %ile Median 75th %ile N= Executives critical for long-term success 20% 45% 111% 6 Senior Management 18% 30% 106% 6 Employees critical in short-term for integration Other Employees Mercer LLC.

13 Retention Programs Bonuses tend to be larger for acquisitions than for divestitures Incentive size also depends on the type of deal. Companies acquiring another company or a division tend to offer larger retention incentives to important employee groups in the acquired company than do companies selling off a business. As a seller our focus is to ensure that the management team and key talent stay on board through the closing often a small population that has to be retained for a short duration. When we are the buyer s position, it s a much bigger challenge to retain a broader population for longer which means retention incentives need to be more compelling. Survey participant 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Typical Median Retention Bonus as % Base Salary Acquisitions vs. Divestitures 45% 45% 45% Executives critical for long-term success 30% Senior Management 30% 25% Employees critical in short-term for integration 10% 5% Other Employees Acquisitions Divestitures III. Conditions for Payment A majority of plans condition payment only on time Retention incentives are used primarily to induce key employees to stay with the company for a certain period of time in light of employment uncertainties arising in connection with the transaction. Thus, the majority of participants in this survey condition their retention payments only on time either through closing or, more often, for a defined period after closing. Roughly a third of companies (36%) also tie payments to integration milestones. Only a fifth (22%) of participants tie retention bonuses to financial performance. Conditions for Retention Bonus 80% 70% 60% 50% 40% 30% 20% 10% 0% 58% Stay through closing of deal 75% Stay for a defined period after closing 36% Performance - Integration Milestone 22% Performance - Financial Objectives 2% Other Mercer LLC.

14 Retention Programs Buyers are more likely than sellers to condition payments on financial performance Companies divesting a business unit or other part of the company condition retention payments on financial (performance-based) objectives in only 9% of deals, whereas those acquiring a company are more likely to condition payment on financial performance metrics (26% of deals). This could be because companies divesting a business are more concerned with ensuring that key talent remains with the company until close; acquiring companies, on the other hand, are also focused on the long-term performance of the acquired talent. Conditions for Retention Bonus Acquisitions vs. Divestitures Acquisitions Divestitures Stay through closing of deal 57% 73% Stay for a defined period after closing 88% 45% Performance - Milestone 38% 27% Performance - Financial Objectives 26% 9% Acquisitions based on 42 responses. Divestitures based on 11 responses. Some participants provided more than one response. IV. Timing of Payout Most retention plans pay out only after deal closing Mercer's experience has been that key employees are most at risk of leaving an organization during the period between deal announcement and three-to-six months after deal closing. Although buyers typically want to retain key employees through this entire period, they have no formal relationship with these employees prior to closing. Therefore, retention programs offered by buyers typically require employees to stay from close until a future date following close, at which time retention incentives are paid. Frequently buyers, with the seller s cooperation, reach out to key executives prior to closing to communicate the retention program that awaits them once the deal closes. It s critical to bring individuals on board quickly. The sooner individuals are on-boarded, the more effective they are and the more successful we are as a company. Survey participant Retention Payment Timing 78% 80% Employees critical for longterm success of deal Employees critical in shortterm integration 12% 11% 10% 9% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Paid fully at or before close Paid only after close (ex: 3 months after close) Part paid before close; rest paid after close Mercer LLC.

15 Retention Programs Retention plans provided by sellers typically pay out only a few months after closing The seller s interest in retention is often somewhat different from the buyer s. The seller typically wants to keep the management team and key talent intact between deal announcement and closing so retention incentives offered by sellers are more likely made payable upon closing than are those offered by buyers. However, this arrangement does provide some motivation for key employees to leave immediately upon closing, once they have collected the retention payment. To address this issue, a majority of plans offered by sellers require employees to stay with the company for some number of months past closing to earn a payout. Since the employee s relationship with the seller ends at closing, such a plan usually requires the buyer to agree to accept the retention agreements and pay the retention amounts when due. To the extent a seller-provided retention incentive replaces the need for a new retention incentive post close, the buyer may not consider this financial obligation in determining the purchase price Retention Payment Timing Typical Structures, Acquisitions vs. Divestitures 80% 70% 60% 50% 40% 30% 20% 10% 0% 29% 21% 15% 10% Paid fully at or before close 75% 75% 57% 50% Paid only after close (ex: 3 months after close) 15% 10% 29% 14% Part paid before close; rest paid after close Acquisitions - Employees critical for long-term success of deal Acquisitions - Employees critical in short-term integration Divestitures - Employees critical for long-term success of deal Divestitures - Employees critical in short-term integration Payout term is longer for employees critical to long-term success than for those critical only to integration The retention bonus is a temporary reward designed to discourage key employees from leaving. The longer these employees stay after close, the more effectively new owners are able to retain and engage them. Mercer research shows that employees key to integration are typically paid within 12 months after close, while those critical in the longer term are typically paid in installments over a 24-month period Mercer LLC.

16 Retention Programs V. Number of Payments The number of payments and their timing are closely linked to the retention objectives and are correlated to the size of the retention bonus. If the objective is integration, bonuses are smaller and are paid in one lump sum. For longer-term retention, bonuses are larger and are paid in two to three installments. Lump sum payments are most common While employees critical to long-term success are more likely than those critical to integration to receive their incentive payments in multiple installments, almost half (48%) receive their incentives in one lump sum payment. Meanwhile, employees critical to integration receive an all-in-one payment in 60% of deals. Acquisitions are more likely to pay in multiple installments where as divestitures are more likely to pay out in one or two installments. Payment Installments By Employee Group Employees Critical for Long- Term Success of Deal Employees Critical in Short- Term for Integration Prevalence N= Prevalence N= All in one payment 48% 25 60% 25 2 payments 23% 12 19% 8 3 payments 13% 7 12% 5 4 or more payments 15% 8 10% 4 Companies in the U.S. are more likely to pay in multiple installments than those in other regions According to survey data, the U.S. is the only region in which companies are more likely to pay retention incentives in multiple installments than in one and the only region in which companies sometimes pay in four or more installments. Retention Bonus Installments Employees Critical for Long-term Success of Deal 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 89% 88% 75% 32% 23% 25% 26% 19% 13% 11% 0% 0% 0% 0% 0% 0% All in one payment 2 payments 3 payments 4 or more payments United States Canada Europe Asia Pacific Mercer LLC.

17 Retention Programs VI. Payout Vehicles Retention incentives are most often paid in cash Cash is by far the most prevalent payout vehicle used by survey participants (used as part or all of the retention incentive in 96% of deals). Non-financial vehicles, such as career enhancement and progression opportunities, are sometimes offered in conjunction with a retention bonus to increase the employee s motivation, but are never used in place of financial vehicles. When equity is awarded in the US, Canada or Asia Pacific it is done so in conjunction with a cash payment. Prevalence N= Cash Only 64% 35 Cash & Equity 27% 15 Cash & Equity & Non-Financial 4% 2 Cash & Non-Financial 2% 1 Total - Payouts using Cash 96% 53 Other Vehicles: Equity & Non-Financial 4% 2 Equity Only 0% 0 Non-Financial Only 0% 0 Percentages may not add to 100% due to rounding Equity is much more commonly used as part of a retention program for an acquisition than for a divestiture. Given the benefits of equity in tying employees incentives to those of long-term company shareholders, it is used in 30% of the observed acquisitions; equity is not used by any companies undergoing divestitures Mercer LLC.

18 Retention Programs VII. Overall Program Cost Across the deals captured in this survey, the retention pool size as a percentage of deal size decreased as deal size increased. For deals under USD $100 million, the median retention program size was 2% of deal cost; for deals greater than $1 billion, the median retention pool size fell to 0.25% of deal cost. As expected, retention bonus pools as a percentage of deal value are smaller for divestitures than for acquisitions. Retention Incentive Pool as % Deal Value By Deal Size 25th %ile Median 75th %ile Less than $100M 0.75% 2.00% 2.75% $100M - $1B 0.75% 1.25% 2.75% Greater than $1B 0.25% 0.25% 0.75% The technology industry provides larger retention bonus pools Companies in the technology sector provide larger retention incentive pools as a percentage of deal value than did companies in the other sectors surveyed. This finding reinforces our belief that concerns about retention are greater for companies where specialized knowledge, intellectual property and talent are critical to deal success; for transactions in the technology sector, the importance of human capital is especially acute, which contributes to the importance of retention. than land and assets we need the intellectual capital and skills to bu Survey participant Total Pool as % Deal Value Technology Industry Total Pool % 75 th %ile 2.50% Median 2.25% 25 th %ile 0.75% Mercer LLC.

19 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 4 TRANSACTION BONUS PROGRAMS 5

20 Transaction Bonus Programs 4 Transaction Bonus Programs I. Eligibility and Participation CEOs, executives and deal team members get the bulk of transaction bonuses Executives other than the CEO are the employees most often targeted for a transaction bonus (42% of deals). Participants in roughly a third (33%) of deals provide transaction bonuses to deal team members, while 31% provide them to the CEO. Other employees were less likely to receive a transaction bonus. 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Transaction Bonus Eligibility 42% 31% 33% 17% CEO Other Executives Deal Team Other Employees European companies are more likely to provide transaction bonuses Companies in Europe and Asia Pacific are more likely to provide transaction bonuses to CEOs and other executives than companies in the U.S. and Canada. However, while deal team members are the most likely employees to receive a transaction bonus from companies in Europe (90% of deals), companies surveyed in Asia Pacific never provide transaction bonuses to deal team members. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 21% 0% 60% 33% 25% 70% 50% 50% Transaction Bonus Eligibility By Region 90% 25% 17% 13% 13% 40% 0% 0% CEO Other Executives Deal Team Other Employees United States Canada Europe Asia Pacific Mercer LLC.

21 Transaction Bonus Programs II. Individual Award Levels Transaction bonus award levels are usually smaller than retention award levels since they reward employees for incremental work beyond normal duties or for a successful transaction, rather than strategic retention. However, for the deals profiled by participants in this survey, transaction award amounts varies greatly; for executives including the CEO, award size ranges from 5% to 200% of base salary. Transaction Bonus as % Base Salary 25th %ile Median 75th %ile N= CEO 5% 5% 23% 14 Other Executives 5% 15% 25% 18 Deal Team Member - High Involvement 5% 5% 15% 17 Deal Team Member - Low Involvement 5% 5% 5% 14 Other Employees 5% 5% 5% 12 European companies award transaction bonuses to deal team, more so than to executives Finally, while transaction bonuses as a percentage of base salary for deal team members are fairly consistent among companies in the U.S. and Europe, companies in Europe provide much smaller transaction bonuses to CEOs and other executives than companies in the U.S. With deal team members being eligible in 90% of European deals, we can speculate that they focus transaction bonuses on people on the deal team more so than the executives. Transaction Bonus as % Base Salary By Region United States 25th %ile Median 75th %ile N= CEO - 113% - 4 Other Executives 8% 20% 89% 6 Deal team members - high involvement 5% 5% 13% 6 Deal team members - low involvement 5% 5% 5% 6 Other Employees - 5% - 4 Europe 25th %ile Median 75th %ile N= CEO 5% 5% 5% 8 Other Executives 5% 5% 15% 8 Deal team members - high involvement 5% 5% 15% 9 Deal team members - low involvement 5% 5% 5% 6 Other Employees 5% 5% 5% Mercer LLC.

22 Transaction Bonus Programs III. Conditions for Payment Bonuses are conditioned on deal closing Transaction bonuses are generally paid only if the deal closes, although deal team members in a small percentage of deals received transaction bonuses regardless of deal closing, reflecting companies desire to reward deal team members for their work on the transaction even if it didn t close. Transaction Bonus Payment Conditions 100% 13% Paid only if deal is closed at a certain price 75% 50% 100% 93% 77% 90% 50% Paid only if deal is closed Paid whether deal is closed or not 25% 0% CEO 7% Other Executives 23% Deal Team Member - High Involvement 10% Deal Team Member - Low Involvement 38% Other Employees Bonuses are rarely conditioned on performance While CEOs, other executives and deal team members are never paid a transaction bonus contingent on the deal closing at a particular price, a small percentage of other employees do receive a bonus that is performance-based, reflecting the ad hoc and discretionary nature of these bonuses Mercer LLC.

23 Transaction Bonus Programs IV. Number of Payments All-in-one payments are the norm Roughly four-fifths of all transaction bonuses are paid in one payment. Companies may pay in more than one payment if they are trying to achieve an additional retentive effect from the transaction bonus. Transaction Bonus Installments 90% 80% 70% 80% 81% Executives Others 60% 50% 40% 30% 20% 20% 19% 10% 0% Alll in one payment 2 or more payments V. Payout Vehicles Transaction bonuses are paid in cash Cash is by far the most common payment vehicle for transaction bonuses (used as part or as the entire transaction bonus in 88% of the deals). Prevalence N= Cash Only 72% 18 Cash & Equity 8% 2 Cash & Equity & Non-Financial 0% 0 Cash & Non-Financial 8% 2 Total - Payouts using Cash: 88% 22 Other Vehicles: Equity & Non-Financial 12% 3 Equity Only 0% 0 Non-Financial Only 0% Mercer LLC.

24 Transaction Bonus Programs VI. Overall Program Cost Transaction bonus pools rarely exceed 0.5% of deal value The median size of the transaction bonus pool among participants is 0.25% of deal value. However, almost three-quarters report a pool of less than 0.5% of deal value, and this is consistent across regions. Total Pool as % Deal Value 75th %ile 0.63% Median 0.25% 25th %ile 0.25% Based on 22 responses Mercer LLC.

25 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 5 DESIGNING YOUR RETENTION BONUS PROGRAM 6

26 Designing Your Retention Bonus Program 5 Designing Your Retention Bonus Program As the data in this report makes clear, there is no one-size-fits-all retention incentive program. While many of the plans included in this study share certain characteristics, retention plan design varies in some cases, significantly based on deal size and complexity, type of deal, industry sector, region and whether the transaction is cross-border. And even among like deals, there is considerable variation. When developing your strategic retention bonus program, we believe it s critical to look beyond market benchmarks to examine your own unique needs and context. The following four steps will help you develop the most effective program to meet your needs. I. Examine Whether a Retention Plan Is Critical To Deal Success The first step is to determine whether a retention incentive program is critical given your objectives. Key questions to answer include: Will the business be negatively impacted if key employees leave? How does the deal impact the employment situation? Do ongoing post-close HR programs encourage retention? II. Evaluate The Population For a Strategic Retention Program We recommend that companies base retention incentive program eligibility on two factors: The impact the individual has on either integration success or long-term performance The likelihood that the individual will leave Often, the seller will work with the buyer to quickly identify those high-impact, high-risk individuals who might be difficult to replace in the short-term. Established tools for succession planning and business risk assessment can be very useful in identifying these individuals Mercer LLC.

27 Designing Your Retention Bonus Program III. Determine the Award Sizes for Retention Program Participants There are three questions companies should ask in order to determine retention award levels: 1. What is the total plan cost? Deal valuation should incorporate potential retention plan costs to get a true sense of the total cost of deal completion and integration. Companies can either adopt a bottom-up approach (determine the population targeted for retention and their respective award levels to arrive at an overall program cost) or a top-down approach (determine the total pool in the context of the deal value and determine awards based on this). 2. Is the award meaningful to the employee and sufficient where a competitor cannot easily buy out the award? The award should be large enough to dissuade participants from looking for other opportunities despite the uncertainty and perceived risk to their jobs and careers. The size of the annual pay package and any change-in-control severance arrangements are also relevant an above-market pay package or a substantial severance for termination following a change-in-control may indicate that a modest retention award is appropriate. In some situations, existing long-term incentives are cashed out upon closing of the deal, resulting in a windfall payout, especially for executives. At the same time, new long-term incentive plans that are put in place will not pay out for three to five years. Flush with cash from the windfall, executives will have relatively little at-risk pay if they were to leave six to twelve months following close. Retention plans can be used to bridge this gap with shorter-term payments. 3. Should different roles have different award levels? A tiered approach can ensure that awards are proportionate to the risk-impact profile and are meaningful to individuals at various levels. Executives who are critical to long-term success typically receive the largest awards, while professionals critical to post-deal integration usually receive smaller awards. IV. Clarify Conditions for Payment: Pay-for-Stay Or Pay-for-Performance? Participants tend to discount the value of a retention award if it comes with a performance condition, as there is uncertainty associated with its payout. Therefore, it is important to have a clear understanding of the objective of the retention plan when deciding whether to include performance conditions. If the objective is to retain key employees despite significant employment uncertainty, performance conditions may undermine the effectiveness of the retention plan by placing too much of the award at risk. However, some situations are more suited for using performance conditions. For example, companies might consider synergy milestones for executives leading post-merger integration work streams or deadlines for function heads to ensure stand-alone capabilities in a divestiture situation Mercer LLC.

28 SURVEY OF M&A RETENTION AND TRANSACTION PROGRAMS 6 PARTICIPANT PROFILE 7

29 Participant Profile 6 Participant Profile This survey was conducted in the spring and summer of Participants were selected on the basis of having completed at least one successful M&A transaction over the past three years. A total of 42 organizations headquartered around the world participated in the survey. Each participant had the opportunity to report data for up to three recent transactions as well as data on the typical retention and transaction bonus structures it utilizes. The information presented in this report represents over 70 recent transactions completed by participants. I. Participants M&A Experience The participants in this survey are all large and complex organizations and are well experienced in M&A transactions. Some participants completed as many as 41 transactions in the time period covered by the survey, while others completed far fewer. Among all transactions completed by participants over the three years ending in 2011, 62% included a retention bonus program and 25% included a transaction bonus program. The deals closed by participants over the past three years ranged in size from $2 million to almost $4 billion, with a median size of $105.2 million. II. Participant List Albemarle Corporation Britvic PLC Caterpillar Chevron Corning China CSA Group Cytec Industries Inc. Daiichi Sankyo, Inc. Dockwise B.V. Emerson Network Power Florida Ice & Farm Co. Fujitsu Technology Solutions GmbH GE China Gibson Energy Inc. Grupo ICA Heineken Heineken International HP IBM J&J Medical JDSU Kolon Industries, Inc Liberty Seguros Argentina S.A. Lixil Corporation Melbourne IT NCR Nokia Siemens Networks OpenText Pantaleon, S.A. PTT International Company Limited RBC Shell SNC Lavalin Group Inc. Solera Solvay Sumitomo Heavy Industries, Ltd. Symantec Symcor Inc. The Hershey Company The Principal Financial Group TMX Group Inc. Tyco International Mercer LLC.

30 Participant Profile III. Geography Approximately two-thirds of participants are based in the U.S. and Canada, 19% are based in Europe, 14% in Asia Pacific and 7% in Central America Central America 7% Canada 17% United States 43% Asia Pacific 14% Europe 19% Mercer LLC.

31 Participant Profile IV. Industry Survey participants come from diverse industries and employ a wide variety of business models. The largest sectors represented include: Technology (33%), Consumer Products (19%), Services (12%) and Energy (10%). Diversified / Conglomerate, 5% Other, 5% Transportation, 2% Finance, Banking & Insurance, 7% Technology, 33% Manufacturing, 7% Energy, 10% Services, 12% Consumer Products, 19% V. Size and Capitalization The table below provides data on participants annual revenue as of the last fiscal year, market value as of the completion of the survey (for those companies that are publicly traded), and number of employees as of the end of the company s most recent fiscal year. 25th %ile Median 75th %ile N= Revenue (USD Millions) $1,653 $5,295 $18, Market Value (USD Millions) $2,554 $5,700 $25, Employees 2,950 13,450 45, Mercer LLC.

32 Mercer (US) Inc Avenue of the Americas New York, NY