Many private equity firms move from the acquisition to the value creation phase with a focus on improving efficiency and cutting costs. Learn how reviews of total reward packages can lead to improved employee performance with a few targeted investments.
Private equity firm leaders need to consider the costs and benefits of every significant change at an acquired business during the value creation phase as part of their investment thesis. It may sound counterintuitive to suggest reviewing and possibly enhancing benefits available to executives and staff during this period. But a competitive total rewards package is a critical component of enhancing value after an acquisition and strengthening the business in ways that will make it more attractive to buyers when the private equity firm moves into the exit phase.
Many private equity acquisitions represent the first time that a family-owned or closely held business has been examined from the outside. Existing processes for managing incentives like bonuses and compensation increases may be somewhat arbitrary and out of step with trends in the market. Other potential benefits that could improve employee engagement at a relatively low cost may have been overlooked. In short, a review of a business’s total rewards program during the value creation phase could identify cost-effective ways to improve employee engagement and address cultural challenges like high turnover and complacency.
What is “total rewards?”
“Total rewards” refers to the full scope of a company’s compensation and benefits structure. The concept encompasses everything from base compensation, bonuses, and other incentive-based payments to healthcare, retirement plans, paid time off, professional development opportunities, work/life balance initiatives, fringe benefits, and perquisites.
“Total rewards” refers to the full scope of a company’s compensation and benefits structure.
Smaller companies that make for appealing acquisition targets have built their businesses using compensation and benefits programs that are outdated, out of compliance, or poorly structured and expensive to maintain. The value creation phase of a private equity acquisition provides leaders with an opportunity to implement a well-crafted total rewards program that can attract top talent, boost employee retention and engagement, provide a competitive edge in a tight labor market, and, in some instances, accomplish all of those goals at reduced costs.
Total rewards in the value creation phase
As a private equity firm completes an acquisition and shifts to the value creation phase, the focus on compensation and benefits shifts. During acquisition, there’s more of a focus on identifying all benefits programs and performing due diligence on their compliance with federal and state rules to make sure there’s no surprise liability or penalty that needs to be factored into the cost of the deal. The value creation phase gives the private equity firm an opportunity to evaluate the effectiveness of existing programs and consider modifications and additions that could enhance the value of the business.
Evaluating total rewards
The first step in evaluating a company’s existing total rewards is to survey employees and assess their understanding of the current package and their satisfaction with it. These surveys can be used to determine things like:
Employee awareness of certain benefits. It’s amazing how often employees fail to take advantage of valuable benefit programs because they don’t know the programs exist. Providing an underutilized benefit costs a company, without yielding a return in employee appreciation or engagement.
Employee perception of benefits. How do the employees who know about different programs feel about them? Have those who utilized them found them to be effective? Do the programs contribute to an overall improved perception of the employer? What current programs are valued by employees, and what programs are missing the mark?
Employee thoughts on potential new benefits. What types of benefits do employees think would help them to be more effective in their jobs and enjoy the workplace more?
The first step in evaluating a company’s existing total rewards is to survey employees and assess their understanding of the current package and their satisfaction with it.
At the same time, the private equity leadership can be performing its own assessment of where the company’s total rewards package stands in relation to its competitors and in relation to alternative programs available. This is an opportunity to align programs like bonuses with other employers in the marketplace, so awards are based on more objectively measurable performance goals and less on a boss’ “gut feeling.” It’s also an opportunity to see if the benefits that employees like can be provided at lower cost without diminishing the quality of the employee experience.
Assess improvements to total rewards by category
For private equity leaders looking to build value in a recently acquired business, it can help to break down total rewards into key components to evaluate and modify based on specialized criteria. The main components of total rewards that should be assessed include:
Compensation and bonus programs linked to performance. Some family-owned or closely held businesses may have effective performance-related compensation packages that don’t need to be changed, but others may have struggled over the years with somewhat random processes for these key employee rewards. If the business hasn’t implemented one already, private equity firms can improve the value of this aspect of total rewards by tying wage and bonus growth to measurable performance objectives so that everyone benefits from the growth of the business.
Health and wellness programs. Coming out of the employee survey, do the employees feel that health benefits like insurance are meeting their needs? Once a private equity firm assesses whether the current level of health benefits is helping to attract and retain talent or motivating people to seek work elsewhere, it’s time to evaluate whether comparable programs could be available at lower costs. Many options exist to provide benefits like prescription drug coverage at a wide variety of service levels and costs. Employers can also move from a fully insured to a self-insured model to provide employees comparable, or even improved, healthcare benefits at reduced prices and potential tax savings.
Work/life balance initiatives. Flexibility generally doesn’t seem to be quite the trend that it was in recent years. However, it can still distinguish an employer in a competitive talent market. One significant development is the move toward “unlimited PTO.” Data shows that there’s no significant uptick in vacation or sick leave utilization among employers who institute these policies, but there’s an important distinction when an employee leaves. Instead of having banked leave hours that must be cashed out by the employer, there is no accumulated leave that the employee is entitled to receive.
Career development opportunities. Many target companies don’t have the maturity to focus on career development. In the family business, the parent who started the company may have succession thoughts among the kids, but otherwise, employees are expected to come in and do their jobs and generally seek promotion by moving to another employer. One way to signal improved opportunities for advancement to employees after a private equity acquisition is to implement leadership development programs and target specific development opportunities such as coaching and mentoring to employees who have been identified as having leadership potential.
A well-rounded approach to building a total rewards program in the value creation phase will weigh the potential costs and benefits of each of these categories of compensation and support to determine which will be most effective for the specific business under review.
Employee feedback loop can refine and improve rewards programs
Once the initial assessment of employee engagement and the evaluation of current and potential programs are completed, it helps to stay in touch with the staff as new programs are introduced. Use surveys, focus groups, and interviews to gather feedback about how any modifications to the benefits programs are being received among the workers. Use these sessions to learn what’s working and to identify ongoing gaps and unmet needs that could help retain employees.
How to tell if total rewards are having the desired result
If a private equity firm’s efforts to improve total rewards during the value creation phase are successful, the business should see:
Enhanced employee engagement and reduced turnover.
Examples of improved cultural and operational excellence.
External validation, such as positive reviews in “best places to work” surveys and social media platforms.
Best practices for implementing total rewards during the value creation phase
During the acquisition phase, the private equity firm usually has limited access to the people and data that allow for a thorough and effective review of a target’s total rewards package. By nature, the acquisition process requires that knowledge of the negotiations be restricted to a very small group of executives at the target. Once the acquisition is completed and the private equity group enters the value creation phase, leaders will have access to a wide range of employees to do the surveys and group interviews that will provide critical feedback on the effectiveness of current rewards and the potential benefits to be gained by enhancing existing programs or adding new ones.
Private equity firms should focus on a holistic approach that combines monetary and nonmonetary benefits to address all facets of employees’ personal and professional lives. That approach also needs to rely on continuous feedback from the affected parties. The surveys and employee feedback that support the initial analysis of a target’s total rewards program should be integrated into the regular management of the business so that leaders stay attuned to potential changes that could make the workforce happier and more productive.
Private equity firms should focus on a holistic approach that combines monetary and nonmonetary benefits to address all facets of employees’ personal and professional lives.
Not all improvements in the value creation phase are cost cuts
The total rewards concept points up that the best private equity firms look at the overall market position of an acquisition and take the critical steps necessary to add value. The investment thesis shouldn’t focus solely on cost cuts and maximizing efficiency. It must also consider investments that will generate greater returns at the exit phase. Investments in improved rewards programs can add worth during the value creation phase by attracting top executive talent and retaining the staff-level employees that helped to make the business an attractive target in the first place.
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