Compensation Culture Clash

Merging two or more staffing and compensation systems can be one of the most difficult aspects of any merger oracquisition. Do it wrong, and employees from both companies can be gone before the deal is ever struck.

"What does this mean to me?"

That was Don Mann's first thought on learning that PepsiCo Inc. in Purchase, N.Y., would consolidate the IT staffs of subsidiaries Pepsi-Cola Co., Frito-Lay Inc. and Tropicana Products Inc. into a shared-services organization spanning the entire company.

Mann, who had been a longtime consultant at PepsiCo before joining Frito-Lay, knew that the rest of his staff and colleagues were asking the same question.

After merging in 1965, Pepsi-Cola and Frito-Lay had operated separate IT systems and organizations for more than 30 years. But with the acquisition of Tropicana in 1998, then-CIO Steve Shuckenbrock decided to streamline IT by creating the PepsiCo Business Solutions Group (PBSG).

Sticky personal questions quickly arose. Launching PBSG involved more than technical and operations issues. It also called for the complete restructuring of salary structures, job categories and titles, lines of reporting and career paths. Every IT employee in all of the companies would be affected.

"We faced serious change-management issues," says Mann, who is now vice president of application development at PBSG. "It's not easy to restructure job codes and classifications for employees who've grown up in one company, who are comfortable there, who understand the culture and their career paths."

But these issues about the personal impact of merger-and-acquisition activities must be dealt with alongside salary and benefit issues for IT employees, say benefits consultants, human resources specialists and managers in postmerger IT departments.

Mishandle or ignore such apprehensions, and the manager can expect IT employees to jump ship in droves, regardless of compensation packages, consultants and specialists warn.

PepsiCo became well aware of the value of the approximately 1,000 IT employees who would be part of PBSG, says Shan Burchenal, director of compensation at PepsiCo and the designer of the new compensation structure for PBSG. She and other human resources specialists interviewed IT senior managers to understand their issues and priorities. PepsiCo also contracted with New York-based consulting firm William M. Mercer Inc. for data about what salaries the market was paying for various IT positions.

"We were starting with a white sheet," says Burchenal. "We wanted to be at the forefront of what was being done for IT." In particular, that meant finding ways to get pay beyond base salary to top IT performers.

PepsiCo couldn't match other companies' promises of issuing stock options before their initial public offerings (IPO). But it did institute competitive salaries, extend its performance bonus program down to junior IT employees and institute "hot-skills pay." Employees with skills in extremely high demand, such as Java, SAP and database programming languages, are eligible to receive hot-skills pay worth about 10% of their base salaries, with installments paid quarterly.

"You can pretty much do what you want to reward performance," says Burchenal. However, be prepared to take some flack from other departments about IT-specific compensation structures, she says.

"We had to educate our counterparts in sister divisions about IT's unique needs," says Leslie Wilemon, human resources director at PBSG. That was especially true of the bonus program, which at PepsiCo companies had long been a management-only perk.

The name game

Unlike PepsiCo, most companies don't approach merged IT departments with a clean slate. Instead, they try to shoehorn the new acquisition into an existing structure, which often leads to poorly integrated IT departments. The result is that workers don't fulfill their hoped-for potential, says David Van De Voort, principal consultant at Mercer's IT Workforce Effectiveness Group in Chicago.

For example, job titles and categories, which often define IT career tracks and salary levels, can't be thought of as minor details. Ltd., an interactive services firm in New York, acquired eight other properties within about two years, building an IT staff of some 55 people, with 40 in regional and international offices.

"There were vast differences in the titles people gave to the different skills," says CIO Danny Gumport.'s IT managers approached the problem first by looking at job descriptions and agreeing on IT disciplines, then working to define common job titles across the offices.

"It's tough to know if you have the talent you need when all the titles are different," Gumport adds.

Synchronizing job titles also helps offer equitable pay across job titles, whether the job is in Copenhagen or New York. However, Gumport says, there are regional differences in the firm's IT salaries, reflecting the hiring competition and cost of living in different cities and countries.

The options issue

At some firms, IT employees hope to earn a lot more by cashing in stock options after an IPO. That was true at and Inc., but both companies were acquired by Student Advantage Inc. before they could launch IPOs. That meant IT employees had to be educated about the differences between preliminary options and options in an already-public company.

Some employees had to be reminded that options aren't stock and don't have monetary value, says Debra Gibb, CIO and senior vice president at San Diego-based, now a division of Boston-based Student Advantage. That was hard to hear for some veterans with fully vested options.

"But many people were tired of the promises that 'Yeah, yeah, we're going public,' " says Gibb. These people were relieved to work for a stable public company. She also notes that public companies are required by law to reveal more about their finances and performance than small, private start-ups. "Nothing is hidden," Gibb says.

Also, while the promise of instant wealth disappeared, new benefits arose. For example, had been so small, it had a weak benefits program, says Travis Bowie, co-founder of that firm and now senior manager of business development at Student Advantage. After the acquisition, staff could participate in a 401(k) program with employer matching funds, and they could receive health care benefits.

Student Advantage allowed years of employment with to count toward its 401(k) plan vesting requirements, enabling some IT staff to be fully vested immediately. "A little thing like recognizing an original start date went a very long way with the staff," Gibb says.

Talk early, often and honestly

Recognizing these emotional issues and addressing them by communicating early, often and honestly makes a huge difference in how IT employees respond to a merger, say veterans of mergers and acquisitions. One way to successfully manage those issues is to focus on the employment environment first, says Gibb.

"Talk about why the merger is good for both departments and find out what technology and support you can offer the other IT team so their projects are successful," she says. But focusing only on personal finance issues can consume business goals and lead to bad relations, says Gibb, who integrated IT staffs from several acquisitions completed before being acquired itself. "You don't want the acquired IT team to hold you hostage," she says.

All of the companies interviewed by Computerworld generally created new employment offers for the acquired IT staff. Presentation of such offers is critical. The human resources team at PBSG held individual meetings for every one of the more than 1,000 IT employees, providing them with personalized materials and explaining such things as their new job codes, titles, roles in the new structure, career tracks and reporting structure.

"Your success hinges on how well you deal with people as individuals," says Burchenal, echoing others who've gone through mergers and acquisitions.

Still, not everyone was happy about PepsiCo's consolication efforts, Mann says, noting that some IT staffers had spent long careers working exclusively for Frito-Lay or Pepsi-Cola and had difficulties adjusting to some of the changes that came with new salary structures, such as greater responsibility for managing their own careers.

Yet IT employees who did choose to leave say PepsiCo was completely honest with them about what the creation of PBSG would mean to them, Mann says. "No one felt lied to," he says. "That honesty just defused so many issues."

Watson is a freelance writer in Chicago.

For more information, head to Computerworld's Merger Resources Center.

Copyright © 2000 IDG Communications, Inc.

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