The Advisors' Blog

– Liz Dunshee

This Willis Towers Watson memo gives suggestions for handling annual, long-term and deal-related incentives at an acquiring company. Here’s an excerpt:

One of the biggest challenges with acquirers’ incentive compensation is performance scoring when financials of the acquired company gets consolidated. Let’s start with annual incentive. In our experience, the prevailing approach on adjusting incentive compensation in an acquisition year tends to vary based on the timing of the deal’s close.

– When a deal closes at the beginning of the year, acquired company financials are almost always reflected in the acquirer’s financial goals for the entire year, with any necessary adjustments to back out one-time acquisition-related costs.

– This treatment is typically reversed for deals that close in the fourth quarter, with acquired company financials excluded from both the goals and the results, as the acquirer’s executives would not have sufficient time to impact the results.

– For deals that close in the second or third quarter, the treatment of an acquirer’s annual incentive plan tends to vary by deal circumstances and integration strategy. If an acquirer wants to integrate the acquired business into its own operations, it’s more likely to consider the acquired company’s financial performance from the close date to the end of the fiscal year in bonus scoring.

In previous years, many public companies resisted changing bonus plan financial goals midyear, because it reduced or eliminated the tax deductibility of bonus payments to the CEO and other named executive officers. However, the 2017 Tax Cuts and Jobs Act eliminated the performance-based compensation exception under Internal Revenue Code Section 162(m), so there is no longer a need for acquirers to consider any potential impact on tax deductibility when deciding what to do with outstanding bonuses.