Mergers & Acquisitions: Pay restructuring may be needed

If you read nothing else, read this…

  • Inheriting another organisation’s pay and salary levels can throw up a number of challenges for employers.
  • Where two different pay scales exist, employers may need to start from scratch, creating new job titles and descriptions.
  • Employee benefits must also be taken into account, because these may skew the balance of what is offered.
  • If an organisation plans to leave an acquisition to run independently, it may not need to worry about aligning pay structures.

Case study: Santander accounts for many changes after acquisitions

Mergers and acquisitions are not uncommon in the banking sector and 2008 was a busy year on this front. Ian Cunning, senior reward manager, human resources at Santander, says: “Towards the end of the year we acquired Alliance and Leicester, the retail deposit arm of Bradford and Bingley and the card division of GE Money. This almost doubled our headcount, taking us from 16,000 staff to 26,000. It was an interesting time.”

Given the scale of these acquisitions, harmonising pay and benefits took time. “Initially, we had to establish key principles and objectives,” says Cunning. “These included simplicity, cost-effectiveness, fit for purpose and to be competitive in the market.”

One of the first areas to be tackled was pay and salary grades. “We were relatively lucky as similar scales operated across the companies,” says Cunning. “Also, because we were moving from Abbey to Santander, we were able to introduce a new system across the board. We implemented one structure to ensure equal pay, but also to enable employees to understand where they were in career development. On top of this, local changes were brought in to take account of shift allowances, overtime, and so on.”

Harmonising pay scales between merged organisations may call for some restructuring to avoid conflicts, says Sam Barrett

Inheriting another organisation’s pay bands and salary levels can throw up a number of challenges. Paying different rates can affect morale and cause recruitment and retention problems, and could also land employers in hot water legally. Gary Luck, director of consulting services at Towers Watson, says: “The key to getting pay right is to go right back to the beginning and understand the logic behind the merger. This will determine the degree and speed of any changes.”

For example, if an organisation has bought a company to gain a new product or enter a new market, it might not need to worry about integrating and reviewing pay structures. Mark Thompson, associate director at the Hay Group, says: “A good example is Unilever. It has taken over lots of companies but because they are different, they can be left to run independently.”

But if an organisation is combining two similar businesses where staff have similar roles, such as when consultancies Towers Perrin and Watson Wyatt merged last year to form Towers Watson, harmonising pay bands and salary levels will be important to engage staff and achieve common goals.

Where harmonisation is required, the first thing to do is determine some form of pay scale to apply to all jobs. “The starting point is establishing relative job size,” says Luck. “Employers need a mechanism to understand the relative weight of each job and map them onto the scale.”

A grading system can help, says Ben Wells, senior consultant at Buck Consultants, and many organisations operate one. “The easiest scenario is where they both operate the same structure, but this does not happen often. We see situations where one company operates a grading system and the other does not. If this happens, we would look to adopt the grading system across the organisation. The worst scenario is where there are two different systems in place.”

If two different pay scales exist, it may mean starting afresh, creating new job titles and descriptions and transferring staff onto these. Such change can require considerable thought and consultation with employees.
But even if the two organisations operate similar pay scales, it is not always simple. Some staff may be paid significantly more, or less, than their colleagues, making it difficult to map them onto the scale. Luck says this can indicate a more basic problem. “If an employer finds someone is way out on the pay scale, it is usually because they are not doing the job their title suggests. The employer may need to promote them or manage them into a different role.”

Benefits may skew the balance

As well as pay levels, employee benefits must also be considered, because the value of these can skew the balance. For example, if one organisation pays generous salaries but has little in the way of benefits while the other offers generous benefits but a lower salary, this would need to be taken into consideration when harmonising pay.
“This can be tricky, especially if an employer is bringing in highly-paid staff,” says Hay Group’s Thompson. “Use total reward to demonstrate the value of each employee’s package. As pay is contractual, it might need to do a deal, either collectively or individually, to reduce pay in return for enhanced benefits.”

Thompson suggests using flexible benefits to enable staff to trade some of their pay for perks. “If the packages are roughly equal, this can work well,” he says.

Another factor to take into account when setting pay levels is how the employer wants to be perceived. A review of market rates will help gauge where it sits compared with its peers, but it must also consider whether these rates are affected by the merger. For instance, if a merger makes an organisation a market leader, it may find it does not need to be so generous with pay to attract staff.

Matthew Howse, partner in the labour and employment team at Morgan Lewis, says: “You do see organisations that are prepared to risk tribunals over constructive dismissal when they adjust pay, but this is unusual. Most prefer to take it slowly, harmonising pay levels over many years.”

Taking time allows more gradual changes to be made. For instance, someone at the top of their pay band could be given smaller pay rises than someone at the bottom of the band to bring them more into line.

A good communications strategy is essential, says Howse. “Even if an employer is only changing the structure and staff pay will not be affected, it still needs to show that no one will be any worse off.”

Buck’s Wells says using all available channels for communications, including trade unions, staff councils and one-to-one meetings, will help to win approval.


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Legal issues

  • In a merger, it is important to consider legal implications if undertaking a wholesale review of employee reward.
  • The Transfer of Undertakings (Protection of Employment) (Tupe) Regulations apply in most mergers involving employees. A Tupe transfer protects employees’ contractual agreements.
  • This does not rule out a harmonised approach, but the employer has to show an economic or organisational reason to change reward.
  • The Equality Act 2010 also comes into play when assessing pay structures. It requires employers to pay the same amount to men and women doing equal work.
  • Although it is important to bear the Equality Act in mind, it is rarely a problem. This is typically more of an issue for the public sector, where many people carry out the same role, but it can cause problems if an employer has a critical mass of people performing the same function.

Read more articles on mergers and acquisitions