Compensation Policy, Human Resource Management Practices and Takeovers

This paper considers the role of compensation policy and human resource management practices in mergers and acquisitions. First, it considers the importance of different aspects of these two employee-side characteristics for distinguishing acquired and acquiring firms. Second, it examines which individuals from which firms remain with the newly created entity after the takeover. Using a unique employer-employee linked data set for France, we find that acquired firms tend to under pay and under reward seniority relative to acquiring firms and they also tend to employ workers whose average job seniority is lower. Despite the minimal differences ex ante in the characteristics of the workforces of acquired and acquiring firms, the human resources department seems to be quite active in the post-takeover period, with employees of the taken over firm being much less likely to remain with the new entity after takeover than those of the acquiring firm. The workers with characteristics that earn high returns in the market are also those who are more likely to stay after the takeover occurs, while employees of acquiring firms that less generously rewarded seniority before the takeover are more likely to remain with the successor firm afterwards, as are those of acquired firms that rewarded seniority particularly well. These results are consistent with Jensen and Meckling's (1976) model of takeovers as a means of controlling the actions of managers.