Non-GAAP Adjustments: Impact of Merger and Acquisition Activity on Performance Targets and Results
Introduction One of the more complex issues when measuring performance for incentive plan purposes is how to consider the effect of mergers, acquisitions, dispositions, and the related transaction costs (M&A activity) on financial performance during the performance period. This is due in large part to the difficulty in anticipating/budgeting M&A activity when setting incentive plan […]
Mike Kesner is a Partner and Steve Pakela is a Managing Partner at Pay Governance. This post is based on their Pay Governance memorandum.
Introduction
One of the more complex issues when measuring performance for incentive plan purposes is how to consider the effect of mergers, acquisitions, dispositions, and the related transaction costs (M&A activity) on financial performance during the performance period. This is due in large part to the difficulty in anticipating/budgeting M&A activity when setting incentive plan targets at the beginning of the performance period and the outsized effect such activity can have on financial results (both positive and negative), depending on the measures being used and the effect the transaction may have on shareholder value. Based on our experience, approaches to adjusting for M&A activity are highly situational, and it is difficult to quantify what constitutes “typical” market practice.
This Viewpoint explores the key considerations that drive the treatment of M&A adjustments, and alternatives companies may consider when determining performance for incentive plan purposes using some common transactional situations.
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