[Excerpt] In 2017, companies announced over 50,600 M&A transactions with a total value of over $3.5 trillion. Approximately 80% of these M&A deals fail for a variety of reasons: culture differences, stark operational differences, and budget constraints. Due to the nature of M&A activity, employee LTIPs – which are often made up of stock options, RSUs, and other forms of equity – are the most affected form of compensation during this process. HR and other business leaders should adhere to best practices and due diligence concerning LTIPs to prevent their firm merger, acquisition, or spin-off from becoming another statistic

McAndrew, Mikaila

White, Blake

English

DigitalCommons@ILR

Cornell University ILR School 
DigitalCommons@ILR 
Student Works ILR Collection 
11-2018 
What are Some Best Practices for Managing Long-Term Incentive 
Plans (LTIP) during M&A Activity and What Impact Do LTIPs Have 
On Employees? 
Mikaila McAndrew 
Cornell University 
Blake White 
Cornell University 
Follow this and additional works at: https://digitalcommons.ilr.cornell.edu/student 
Thank you for downloading an article from DigitalCommons@ILR. 
Support this valuable resource today! 
This Article is brought to you for free and open access by the ILR Collection at DigitalCommons@ILR. It has been 
accepted for inclusion in Student Works by an authorized administrator of DigitalCommons@ILR. For more 
information, please contact catherwood-dig@cornell.edu. 
If you have a disability and are having trouble accessing information on this website or need materials in an 
alternate format, contact web-accessibility@cornell.edu for assistance. 
What are Some Best Practices for Managing Long-Term Incentive Plans (LTIP) 
during M&A Activity and What Impact Do LTIPs Have On Employees? 
Abstract 
[Excerpt] In 2017, companies announced over 50,600 M&A transactions with a total value of over $3.5 
trillion. Approximately 80% of these M&A deals fail for a variety of reasons: culture differences, stark 
operational differences, and budget constraints. Due to the nature of M&A activity, employee LTIPs – 
which are often made up of stock options, RSUs, and other forms of equity – are the most affected form 
of compensation during this process. HR and other business leaders should adhere to best practices and 
due diligence concerning LTIPs to prevent their firm merger, acquisition, or spin-off from becoming 
another statistic. 
Keywords 
human resources, M&A, mergers, acquisitions, long-term incentive plans, stock options, equity, LTIP, cash 
method, conversion method, portfolio approach, dividend approach, short-term incentives, business 
strategy, performance management 
Comments 
Suggested Citation 
McAndrew, M., & White, B. (2018). What are some best practices for managing long-term incentive plans 
(LTIP) during M&A activity and what impact do LTIPs have on employees? Retrieved [insert date] from 
Cornell University, ILR School site: https://digitalcommons.ilr.cornell.edu/student/203 
Required Publisher Statement 
Copyright held by the authors. 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/student/203 
Mikaila McAndrew             November 2018 
Blake White 
EXECUTIVE SUMMARY  
RESEARCH QUESTION 
What are some best practices for managing long-term incentive plans (LTIP) during M&A 
activity and what impact do LTIPs have on employees? 
INTRODUCTION 
In 2017, companies announced over 50,600 M&A transactions with a total value of over 
$3.5 trillion. Approximately 80% of these M&A deals fail for a variety of reasons: culture 
differences, stark operational differences, and budget constraints. Due to the nature of M&A 
activity, employee LTIPs – which are often made up of stock options, RSUs, and other forms of 
equity – are the most affected form of compensation during this process. HR and other business 
leaders should adhere to best practices and due diligence concerning LTIPs to prevent their firm 
merger, acquisition, or spin-off from becoming another statistic. 
BEST PRACTICES 
There are a variety of ways to manage LTIPs during the M&A process. How a company 
approaches stock options, RSUs, and share translation depends strongly on the structure of the 
deal taking place, the employee composition of each firm, and the goals of senior leadership.
There are three key methods for handling stock options during an M&A transition period: 
Assumption, Stock options remain in place, but the number of shares and exercise price are 
adjusted to reflect the transaction. Substitution, Old options are canceled and new options are 
issued under the acquirer's plan. The acquirer's shares used for option exercises are charged 
against the acquirer's equity plan reserve. Cash Method, Old options are cancelled and payment 
is made in cash or stock of the acquirer. Amount of cash out is equal to intrinsic value of the 
option at closing of transaction. Similarly for RSUs, there is the Cash Method and the 
Conversion Method. These methods follow an identical structure to those mentioned for RSUs.1 
For company spin-offs, there are multiple ways to approach share distribution. The three 
most commonly used methods are: Portfolio approach, Equity holdings are treated like those of 
a shareholder at the time of the spin (e.g. equity will be translated to both remaining firm’s 
equity and the new firm’s equity). Concentration approach, Employee’s current equity is 
translated into one firm’s equity alone depending on where the employee resides. Dividend 
approach, This is the most nuanced option of the three and allows the employee to have a choice 
in how options and other equity are managed (See Appendix A).2
IMPACT 
  Although the effectiveness of long-term incentive plans on employee and organizational 
outcomes is inconclusive, there is growing evidence that LTIPs are actually ineffective. Many 
companies who implement LTIPs into their business strategy believe that these types of 
incentives create an ownership mindset for their employees.3 As a result, these employees will be 
held accountable for their performance since their LTIP is linked to company profits. However, 
pay for performance can negatively impact an employee’s intrinsic motivation. Executives 
receiving an LTIP from one company stated that they would be willing to reduce their pay 
package by an average 28% for a job that was more rewarding for non-monetary reasons.4 Large 
pay packages also do not correlate with better performance on the job. Therefore, performance 
cannot be improved simply through monetary incentives like an LTIP. Companies are realizing 
this issue, and some have decided to move from LTIPs to annual cash bonuses. Some firms have 
considered making it a requirement to invest part of the bonus in restricted stock, so that 
executives still own equity of the company without the confusion or inefficiencies of a LTIP. 
These short-term incentives have been regarded by both executives and non-executives as much 
more effective than long term incentives. The short-term incentives have a clearer line of sight 
between action and reward whereas long term incentives failed to do so and were too complex 
and easily misunderstood.5 
Even though there isn’t a conclusive answer on the impact of LTIPs on employee and 
organizational outcomes, companies should consider how they are planning to use these 
incentives. Companies should use short term rewards in order to improve employee engagement 
and motivation. If LTIPs align with the overall business strategy of the company, then leaders 
should consider simplifying the plan to make it as easily understandable and transparent to 
employees as possible. That way, employees know exactly what they are being rewarded for and 
how much they are benefiting from the plan in the long run.  
 
CONCLUSION 
 
  Once a company decides to acquire another company or spin-off part of the company into 
its own entity, leaders need to decide how long term incentive plans for executives will change. 
Before these leaders make a decision, a company should consider all approaches to LTIPs and 
determine which one best aligns with the business strategy and future vision of the new 
company. In addition, leaders should understand that the plan they decide on could also influence 
the work performance and motivation of their employees. By understanding how incentives seem 
to play into these factors, leaders can create a LTIP that successfully aligns with the new 
business strategy without disturbing the current employees’ engagement in the workplace. 
REFERENCES 
 
1. “M&A Basics: Equity Compensation Plans.” Morgan Lewis, Morgan, Lewis & Bockius, 
LLC, www.morganlewis.com/~/media/files/publication/presentation/webinar/eb_mabasic 
Sequitycompensationplans_26feb151.ashx. 
 
2. Gorski, Michael. “How to Deal with Equity Holdings During a Spin-Off.” WorldatWork,  
  WorldatWork, Dec. 2016. 
 
3. Gibson, Ken. “Why Every Company Should Have a Long-Term Incentive Plan (LTIP).”  
  The 4 Parts of a Competitive Pay Strategy, 18 Oct. 2016, blog.vladvisors.com/blog/why- 
  every-company-should-have-a-long-term-incentive-plan-ltip. 
 
4. “The Case against Long-Term Incentive Plans.” Harvard Business Review, vol. 94, no.  
  10, Oct. 2016, pp. 22–23. EBSCOhost, search.ebscohost.com/login.aspx?direct=true 
  &db=bth&AN=118307585&site=ehost-live. 
 
5. Pepper, Alexander, Gore, Julie and Crossman, Alf (2013) Are long-term incentive plans  
  an effective and efficient way of motivating senior executives? Human Resource  
  Management Journal, 23 (1). pp. 36-51. ISSN 0954-5395 
 
 
 
 
 
 
 
 
 
 
 
APPENDIX 
 
Appendix A: 
 
     Gorski, Michael. “How to Deal with Equity Holdings During a Spin-Off.” WorldatWork,  
     WorldatWork, Dec. 2016 


What are Some Best Practices for Managing Long-Term Incentive Plans (LTIP) during M&A Activity and What Impact Do LTIPs Have On Employees?

[Excerpt] In 2017, companies announced over 50,600 M&A transactions with a total value of over $3.5 trillion. Approximately 80% of these M&A deals fail for a variety of reasons: culture differences, stark operational differences, and budget constraints. Due to the nature of M&A activity, employee LTIPs – which are often made up of stock options, RSUs, and other forms of equity – are the most affected form of compensation during this process. HR and other business leaders should adhere to best practices and due diligence concerning LTIPs to prevent their firm merger, acquisition, or spin-off from becoming another statistic.Best_Practices_For_Managing_Long_Term_Incentives_Plans_During_M_A.pdf: 228 downloads, before Oct. 1, 2020

eCommons@Cornell

https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1186&amp;context=student

What are Some Best Practices for Managing Long-Term Incentive Plans (LTIP) during M&A Activity and What Impact Do LTIPs Have On Employees?

Abstract

Similar works

Full text

Available Versions

DigitalCommons@ILR

eCommons@Cornell