Harmonising benefits after a merger or acquisition is a major challenge for HR and reward professionals, says Nicola Sullivan

As the economy continues to slow down, organisations will be forced to review their strategies for growth. Some employers will have to give up on pursuing an aggressive acquisition strategy that is dependent on borrowing until the credit crunch has eased and instead concentrate on consolidating their existing business, while others, if they are lucky enough to have finance at their disposal, will be able to take advantage of expansion opportunities that may arise at an acceptable price.

Last month, for example, the Co-operative Group agreed to buy rival supermarket chain Somerfield, which had been up for sale since January, in a deal worth £1.57 billion. This came hot on the heels of Santander’s agreement to purchase Alliance and Leicester, which is due to be completed in October.

Thrashing out such deals can be a drawn-out, complex process, and often involves HR and reward professionals ascertaining the impact of pay and benefits on costs early on.

For reward professionals who are dealing with a merger or acquisition, or are now taking advantage of a quiet period following a spate of corporate acquisitions to harmonise diverse sets of benefits, the current economic climate means that they will be under pressure to cut overall costs or at the very least keep any expenditure tightly under control.

Not only can it be financially beneficial to harmonise a fragmented and inconsistent benefits structure, but such a move can also enable the newly-merged company to make employees feel as though they are all part of one organisation, with the same values and business objectives.

A lot of hard work and preparation is needed to hit the right notes when it comes to harmonising perks, not least because a workforce that has grown through an acquisition or merger may have complex needs. Disgruntled staff, who may have lost colleagues through redundancies, will need to be won over, and employers must ensure no employees feel they have lost out in the unification process.

This can be tricky if the board is looking to make cost savings for the combined operation as a consequence of the merger. However, reward professionals may find that they can negotiate better deals with suppliers if buying in bulk due to the increased size of the organisation. A flexible benefits scheme may also help them to harmonise benefits in a cost-efficient manner (see right-hand box), but some may find that extra costs are inescapable.

Where possible, employers should work out the potential benefits spend for the enlarged company before finalising an acquisition, enabling them to incorporate any extra costs into the final purchase price. Marco Boschetti, managing director of Towers Perrin’s London office, says: “As soon as the deal is announced, you [should] talk about the purchase price and the level of synergies. That purchase price and the level of synergies come from modelling future costs, and within that you allow for things like harmonising pension plans and all sorts of change agendas, such as branding.”

To budget appropriately, employers must also establish which perks are currently offered in each company involved in the merger, and develop strategies to deal with any major differences. This may be particularly difficult in relation to pensions. For example, one company may operate a defined contribution (DC) pension scheme, while the other still has a defined benefit (DB) plan. Peter Thomson, director of the Future Work Forum at Henley Business School, says: “You can never resolve that sort of major difference. You have got to live with the fact that the two organisations will, historically, have different pension schemes. One solution is to wind up the schemes for new members and then at least arrangements will be consistent for people joining the organisation.”

It is also worthwhile employers finding out what benefits staff would like to receive and which they value. This information can then be used to shape decisions on which perks to retain in their current form or to alter before the company starts developing a strategy to implement any changes.

Novartis, which was created from the merger of Sandoz and Ciba-Geigy in 1996 and went on to combine its agricultural division with that of AstraZeneca to form Syngenta in 2000 before acquiring the Chiron Corporation and NeuTec in 2006, is well experienced in harmonisation and has focused on consolidating benefits in the UK and abroad.

Jeanette Piorkowska, the company’s head of reward for UK and Ireland, says: “Since 2005, the real push has been to harmonise [benefits] across the whole of the UK from a cost-saving point of view and from a market [perspective] as we don’t want some divisions doing a lot more than others. We want to get some consistency across divisions.”

She says Novartis was determined not to rush the process, and has yet to include its vaccine division in its share incentive plans.

Piorkowska warns of the danger of planning to harmonise benefits too quickly. The cost of bringing the target company’s benefits up to the same level immediately could make the deal too expensive, she says. “So you need to [ask], what are the most important things we need to harmonise first, [and] what are the mid-term and some of the longer-term things we need to look at?”Taking a methodical approach will enable an organisation to work towards achieving a balance between its new benefits programme and the perks offered previously. For example, Piorkowska says: “Sandoz gave very little to staff from a benefits side, whereas Ciba-Geigy was very paternalistic and had done a lot more for employees and [their] families. We brought Sandoz’s business up in some benefits areas and the Ciba-Geigy business down in some areas.”

When looking at harmonising perks, employers must also bear in mind their legal requirements under Transfer of Undertakings (Protection of Employment) (Tupe) Regulations. These protect the existing terms and conditions of employees who transfer to an acquiring organisation, and mean that employers cannot simply axe any of employees’ existing perks.

The only possible exception to this is a condition in the Tupe regulations which states that when transferring staff to an acquiring company, employers do not have to transfer an existing pension scheme, but have to provide some form of pension arrangement for staff who were eligible for, or are members of, their former employer’s scheme. In addition, any new arrangement must meet a minimum standard as set out under the Pensions Act 2004.

In general, employers must consult with staff over any changes they want to make to their contractual benefits under the terms of the Information and Consultation of Employees Regulations 2004.

Novartis, for example, held negotiations with external and internal stakeholders, while HR and finance representatives, belonging to a specially convened forum, put together proposals on how to deal with each benefit, which were then put before an executive board. The forum now meets three times a year to review the firm’s benefits.

Some companies choose to harmonise only core benefits such as pensions, which can be less expensive and easier to achieve. Information services supplier Wolters Kluwer, for example, consolidated five pension schemes into a single group personal pension (GPP) after a merger and used the savings it made on administration costs to increase its contributions to the scheme and boost its competitiveness. Colin Williams, executive director of DC pensions at Fidelity International, says: “Schemes with just 20 members will typically cost a huge amount more per member than a GPP with 200 members, both in monetary terms and indirectly in terms of governance overheads. Bringing in one future DC scheme, with a single contribution structure, comes with very significant savings on both these fronts.”

But Anneke Heaton, reward manager at Wolters Kluwer, warns that carefully communicating such changes to staff is vital. “We made sure we anticipated what their concerns would be and covered that in the communication. Rather then sending out a blanket communication to all, if you were coming from a trust-based scheme, the communication you received was directed at the challenges and the changes that were going to happen,” she says.

Mark Bingham, a director of Secondsight, adds employers should communicate with staff in as many ways as possible when harmonising benefits such as pensions, including letters, presentations and offering advice. “You have got to communicate that the new pension is going to be no worse than the old one. If you hold everyone’s hand through the process, give them advice and help them understand it, they will probably think it’s better than the old one. You can’t value something you don’t understand,” he explains.

Whatever approach employers take to benefits post-merger, they should ensure they do not alienate their workforce, particularly if their primary aim is to reduce overall costs, a strategy that is more likely in the current economic climate.

“If anything, people who are left should be at least as well rewarded as, if not better than, before. It is bad management if it is seen as a major cost-cutting exercise in terms of cutting the cost per person as opposed to cutting the overall costs for the workforce,” says Henley Business School’s Thomson.

Case study: Wolters Kluwer

Wolters Kluwer made its pension benefit more competitive by consolidating five separate schemes, resulting from a spate of acquisitions, into one group personal pension plan (GPP) in April.

The money the company saved on administration costs enabled it to increase its pensions contributions by an average of 2 percent for each employee who contributes to the GPP. All new recruits can join the GPP and receive double matching employer contributions on employee contributions of up to 4 percent, giving them a maximum total contribution of 12 percent.

The GPP, which is provided and administered by Fidelity, replaced two trust-based defined contribution schemes and three GPPs. Following the harmonisation into a single scheme, employee take-up of the benefit increased from 65 percent to 85 percent.

Anneke Heaton, reward manager at Wolters Kluwer, explains: “By moving to a single scheme, the charges were lower for everybody and, as a result, they all got a better deal.

“There is now better engagement from employees about pension benefits. There is a greater level of understanding of the benefits.”

Case study: Grant Thornton†

Grant Thornton introduced a flexible benefits scheme and increased the take-up of pension benefits when it launched its new stakeholder pension after its merger with accountancy firm Robson Rhodes in July 2007.

These perks were introduced to its 4,200-strong workforce in April 2008.

Under the terms of the companies’ previous pension schemes, Grant Thornton offered age-based contributions, while Robson Rhodes offered a flat contribution rate of 6 percent for staff who contributed 4 percent to its group personal pension. Post-merger, the new stakeholder scheme offers matching employee contributions of between 3 percent and 8 percent. The overall take-up rate has increased by 400 staff since the changes were made.

Grant Thornton also uses its new flexible benefits plan, provided by Vebnet, to offer staff more choice. The scheme has also been used to deal with the two firms’ annual leave variants, allowing employees to buy up to 10 days’ holiday or sell five days each year.

Jenny Balme, head of reward and relations at Grant Thornton, says: “We wanted to make a statement that this is now a new firm and we wanted the reward for that. It was important that we understood what the constraints were within the business. We wanted to benchmark ourselves against other organisations.”†

Total reward statements were used to communicate the value of the packages.

Using flexible benefits to harmonise perks

A flexible benefits scheme can be a cost-efficient way of harmonising benefits, while fulfilling the expectations of a varied workforce who previously received different perks.

Many employers find flex can take the pain out of the harmonisation process because it also allows employees to make independent choices and buy back perks they had before a merger or acquisition.

Marco Boschetti, managing director of Towers Perrin’s London office, describes flex as the most “elegant” way of integrating complex perks and benefits, while keeping costs to a minimum.

“If anything, during a transaction, margins are squeezed. The level of benefits and rewards comes under pressure, which is why a flexible approach allows companies to take existing packages, shake them around, and quantify them,” he explains.

Peter Thomson, director of the Future Work Forum at Henley Business School, says flex can be a good way for employers to offer common benefits across a number of organisations. “It is useful to think about flexible benefits, essentially keeping the core benefits to a minimum and giving people choice,” he adds.

Using company branding and tools such as total reward statements when communicating a scheme can also help to reinforce an organisation’s new identity and values, as well as relieving the administrative burden by harmonising benefits terms and conditions.

Gareth Ashley-Jones, head of flex at Aon Consulting, explains: “[Organisations] can create their own flexible benefits scheme to form their own employer brand for employees and make a brand distinct from the old company.”