A&M Tax Advisor Weekly

Retention in Market Cycles: Keeping the Talent Needed in Cyclical Industries

Josh Henke, Senior Director

jhenke@alvarezandmarsal.com

September 6, 2018 / North America

Every industry, at some point, will experience a downturn. Those companies that strategically plan for these events, foreseen or unforeseen, are more likely to survive and thrive in a difficult market. In some respects, all industries are cyclical, differentiated only in their severity and the duration of the cycles.

It is common for companies entering bankruptcy to implement retention programs for employees deemed critical to the organization’s survival through the bankruptcy process. These programs retain key talent, are approved by the bankruptcy judge, and provide security for creditors that the company’s number one asset, its people, remains in place. While this talent protection is discussed frequently in struggling companies, it is often overlooked in markets and industries on the uptick.

In companies that are thriving, it is common to see incentive programs that align pay and performance, but most companies do not consider “pay for retention” when industries are flush with cash and competitors are poaching critical talent. There are several key issues, techniques, and pay philosophies that companies should consider in rebounding or high-performing industries.

Retention

The key stakeholders that make corporate compensation program decisions, such as company ownership, compensation committees, and senior management teams, continue to receive strong external pressure from shareholders, proxy advisors like Institutional Shareholder Services (ISS), and shareholder activists to link compensation programs to performance. This continued pressure has driven companies to create highly-levered incentive programs that are tied to, in some circumstances, ineffective or unnecessary performance metrics.

A critical part of any balanced compensation program is retention. In a highly competitive market for talent, strong stock price and incentive plan performance will not be enough to retain the talent needed to continue to differentiate your company in the market. High performers will exit for greener pastures if multiple layers of retention are not implemented. In these types of situations, the following compensation design features can be used to help alleviate some of the outside pressure to compete for talent:

  • Cash retention bonuses – typically utilized below the executive level to provide six-to-twelve-month retention periods
  • Multi-year incentive programs – incentive programs can be established for mid-level employees that provide incentives tied to long-term growth objectives (e.g., compound annual growth rates, “return on” metrics, business-unit-level operation metrics) that provide line-of-sight to long-term performance with multi-year cash payouts
  • Restricted stock – for mid-level to senior-level employees, time- or performance-vested restricted stock or restricted stock units are an effective vehicle to retain employees while also aligning the interests of program participants with that of shareholders
  • Deferred Compensation Programs – these low-cost programs can be designed for key employees with retention in mind while providing tax planning opportunities for participants

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North America