First of all, two important clarifications should be made.
In that piece, we stated the approved bonus pool (disclosed as part of deal documentation) as $125mn. This is indeed the approved pool, but our updated understanding is that this has not been fully deployed at this stage, with less than $75mn believed to have been assigned in this round.
We also suggested some percentage awards relative to salary, indicating they may have topped out in the 100%-150% range (albeit with many lower). Our new understanding is that they sit in the 20%-60% range, averaging around 40%.
With the record now set fully straight, a few observations about the scheme and the approach.
1. Long-term compensation
Well-structured long-term compensation is crucial to effectively incentivise both executives and revenue-producing staff. It is difficult to overstate how important.
Get it right and senior staff will be aligned with shareholders, highly motivated, encouraged to take appropriate levels of risk and retained over the long term.
Long-term compensation structured as retention awards is a little different, and net-net probably more like a necessary evil for employers at times of major change and dislocation like transformative M&A.
Employee expectations probably make rolling out a programme of retention bonuses at the target company unavoidable on the back of something as big as the Aon-Willis deal.
And disappointing those expectations at a time when key staff are likely to be fielding offers from competitors is probably not an option.
2. Deferring problems
Nevertheless, retention bonuses can function as little more than problem deferral.
They do this by distorting incentives and encouraging staff that dislike the combination to remain in place merely to secure a payout. Employees that stay under such circumstances can potentially poison the well and disrupt the integration.
Major retention bonuses, particularly typical three-year cliff-vest structures, can be culturally problematical.
Ultimately, it is difficult to buy true commitment to the cause.
The return on retention bonuses instead comes in two ways. First, it provides the combined firm longer to corporatise business and prove to new clients that it has a compelling value proposition.
Second, it gives management the time to persuade the staff member that they should buy into the new company.
As we have previously suggested, Aon’s human capital strategy seems to rely upon winning the hearts and minds of key staff at Willis.
CEO Greg Case has repeatedly stressed that the transaction is about delivering faster growth through innovation and enhanced capabilities, and alongside president Eric Andersen, has sought to sell the strategic value of the combination to Willis staff.
3. Bull signal
The relatively modest sums offered in retention bonuses (JLT offered staff £100mn just to make it to closing) seem to represent a clear bull signal on the deal, although they have surprised the market.
First of all, they suggest a degree of confidence on the seller’s side that any talent attrition that takes place through to the closing will be insufficient to dissuade the buyer, something which seems highly likely.
And on Aon’s side (although it does not have control of the outcome), the level seems like a sign of confidence that the acquirer can find a way to retain the revenues and talent that it wants without having to load Willis staff up with bonuses pre-closing.
On the revenue side, this is likely to reflect a belief in the firm’s draw for clients, as well as the talent and capabilities it can bring to the table even if it suffers significant defections.
And when it comes to staff, there are to us compelling positive and negative cases that can be made to remain.
The positive pitch to staff will likely revolve around the benefits that come from scale, breadth of capabilities and what is routinely talked about as the best data/analytics offering in the market. Staff may also respond to Case’s oft-stated vision, which stresses the need for the industry to open new frontiers of risk transfer rather than simply fighting over existing market share.
Alongside this positive pitch, there will inevitably be the negative case to remain, which will rely upon understandable staff reluctance to go toe-to-toe with the $20bn-revenue behemoth to compete for clients.
We have talked at length elsewhere about the salary cut and swift reversal, and noted that it may deal harm to Aon’s status as an employer of choice – particularly for those outside the tent – and we don’t want to belabour the point. (See Aon and the war for broking talent.)
The new information over the last week suggests management comfort over the deal’s prospects.
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