Shaun Bisman
Principal
Kelly Malafis
Founding Partner
Michael Bonner
Principal

2021 has been a very active M&A year for regional banks, with some organizations combining through a merger of equals.

As the term suggests, a merger of equals is when two banks of comparable size merge to form a larger new company. There is a lot to consider in these situations to ensure the combination effectively unlocks value for stakeholders. Developing the human capital strategy and compensation program at the pro forma bank is a key factor for the management teams and boards of directors to consider. It is critical they get this right in order to retain and engage critical talent through the key milestones in the merger and beyond. In this guide, we identify some of the key compensation-related items that must be addressed in a merger of equals.

Leadership Structure and Executive Team
In a typical acquisition, the executive team of the acquirer often stays in place and the executive team of the target may take on newly created executive roles or leadership roles in a subsidiary business. In a merger of equals, the combined executive team is typically comprised of executives from both legacy organizations. Companies should identify the best talent to lead the bank well before the close of the merger so they can seamlessly execute on the integration and develop a retention plan.

Companies must also determine if they will combine the roles of CEO and chairman of the board, or if the roles will be split between the two legacy CEOs. It is common in a merger of equals to split the roles for a defined time period. This approach gives the pro forma bank the benefit of the leadership of both legacy CEOs as it navigates how to effectively operate as a new organization and create a harmonized organizational culture.

Compensation Philosophy and Competitive Market
It is important for the newly formed entity to have a cohesive compensation philosophy promoting a “one company” mindset among employees who are from different legacy organizations. The compensation philosophy should guide how the bank now pays its employees, including mix between fixed and variable compensation, mix between cash and equity compensation and where compensation is positioned relative to the market. If the two legacy banks have different compensation philosophies, the pro forma bank should develop a strategy to harmonize these philosophies in the near-term. For example, it set a goal to pay all corporate employees using the same mix by the anniversary of the close of the merger.

The combined entity will also need to define its new competitive market. Clearly, it will need to compare itself to larger institutions than the legacy banks, but it should also consider if there are other differences that should define the competitive market, like if the two legacy banks operated in different geographies or had different operating characteristics. It is paramount that the board compensation committee and management teams identify relevant criteria to define a competitive market that best reflects the combined bank’s business.

Retention and Success Awards
Once the banks establish the compensation philosophy and define the new leadership team, it is important to consider how ongoing compensation programs can incent and retain the new team. A common approach to tie the new team together is by providing a long-term incentive award, often referred to as “success awards.” A portion of the award typically vests based on performance linked to achieving deal-based objectives such as synergies or systems conversions. A portion of the award may also vest over a period of time to provide an additional retentive hook. Success awards with performance conditions are better received by external investors and proxy advisory firms. The combined entity should also consider retention risks among the executive team, including the ability to trigger change in control severance and current equity holdings. This may influence which executives receive additional awards or larger success awards.

A merger of equals can be an exciting but also uncertain time for an organization. Early planning on the new bank’s compensation philosophy, leadership team compensation program and success and retention award approaches can help alleviate some of the uncertainty and allow the executive management team to focus on successfully completing the integration. A well thought-out program can combine the best of both legacy organizations into a harmonized compensation program that supports a “one bank” strategy and culture.

WRITTEN BY

Shaun Bisman

Principal

Shaun Bisman is a principal at Compensation Advisory Partners in New York. He has over 10 years of experience consulting to management and compensation committees. He provides compensation consulting services to both public and privately-held companies, assisting with incentive plan design, performance measurement, pay-for-performance validation, regulatory/compliance and director compensation. Mr. Bisman is a regular speaker for Bank Director, Global Equity Organization, New Jersey Compensation Association, The Knowledge Group and WorldatWork. He also contributes to CAP, Bank Director and Bloomberg BNA publications.

WRITTEN BY

Kelly Malafis

Founding Partner

Kelly Malafis is a founding partner of Compensation Advisory Partners in New York. She has over 20 years of executive compensation consulting experience working with compensation committees and senior management teams. Ms. Malafis has advised large and small publicly traded companies in a variety of industries, including financial services, insurance, pharmaceutical, manufacturing and retail. She has also provided advice on compensation issues for privately-held companies and companies with special circumstances such as IPOs and spin-offs.

WRITTEN BY

Michael Bonner

Principal

Mike Bonner is a principal at Compensation Advisory Partners. He has nearly 10 years of experience working with clients to address a wide array of executive and non-employee director compensation issues, including incentive plan design, compensation benchmarking and performance measurement. Mr. Bonner has experience working with public and private companies across industries and with companies in special situations, including mergers and acquisitions and IPOs. Mr. Bonner writes frequently on executive compensation and has contributed to Corporate Board Member and the Harvard Law School Forum on corporate governance.