An M&A executive compensation checklist: steps to ensuring a successful transaction.

• Author: Delves, Don

Executive compensation is a powerful tool for motivating a company's management team to grow the value of the corporation and accomplish its strategic objectives. Executive compensation can also be a powerful tool to influence positive outcomes in M&A activity. However, recent transactions like the acquisition of Merrill Lynch by Bank of America remind us of the potential for executive pay to get out of hand during a deal. Improperly structured incentives and golden parachutes can also present expensive roadblocks to otherwise desirable transactions. With the recent public outcry over executive compensation, directors now more than ever need to be vigilant when overseeing the role of executive compensation during M&A events. The following checklist covers the key questions that should be addressed by boards when considering a major corporate transaction:

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1. What is the responsibility of the board during a merger or acquisition (in terms of exercising duty of care and sound business judgment)?

   1. In the case of a sale: ensure that the shareholders get the best possible price for the company.

   2. In the case of a purchase: transaction is aligned with shareholder interests, paying a fair price, appropriate strategic fit, appropriate cultural fit, and everyone knows what they are buying (due diligence).

2. What are the key issues a board should consider in terms of executive pay during the transaction?

   1. If selling the company:

      1. Ensure that the appropriate incentives are in place to motivate key management to stay with the company, maximize its value, and facilitate a smooth sale.

      2. Do employment contracts exist? Then revisit change-in-control provisions in employment contracts to ensure that they:

      1. Protect key members of the management team,

      2. Are attractive to potential buyers (eliminate potential deterrents and poison pills).

      3. Will generally be perceived as fair and reasonable.

   2. If purchasing a company:

      1. Ensure that the appropriate incentives are in place to motivate key management to stay with the company through the acquisition.

      2. Ensure that the company is paying a fair price for the incoming management team.

      1. Careful due diligence and review of salary levels, incentive plans and employment contracts

         1) Who has them?

         2) Are there any special 'side deals' or retention bonuses?

      2. Carefully analyze all golden parachute provisions:

         1) How much will senior management be paid:

      1. At the time of the transaction?

      2. ...