Last year’s merger of two mutual fund companies, Houston’s American Capital Management Research and Chicago’s Van Kampen Merritt, was a joining of equals in terms of assets. But when it came to employee benefits, the inequalities were glaring.
American Capital offered life insurance equal to one year’s salary; Van Kampen offered seven times salary. American Capital employees had to pay large shares of their medical bills if they did not use the doctors in the company’s health maintenance organization; Van Kampen picked up much of the cost of any doctors employees chose.
As for Van Kampen’s pension and profit-sharing plans, they were more generous than American’s, too.
So the new company looked for a middle road. All employees now get three times salary in life insurance. The medical plan is a hybrid, better than American Capital’s but not as good as Van Kampen’s. Ditto for the merged company’s pension plan.
As mergers multiply this year, the first worry of the growing ranks of affected workers is the survival of their jobs. That is especially true when the companies plan to lop off a sizable number, such as the 12,000 positions that the Chase Manhattan and Chemical banks set their sights on when they announced their merger last month.
But even if employees make it through the payroll paring, they have another worry: If their benefits plans aren’t protected by a union, they are in high jeopardy.
“When merging companies look at benefits, it is, number one, a cost issue, and number two, an employee relations issue - and believe me, that is the order of importance,” said Gregory Keshishian, a senior vice president of Handy HRM’s executive compensation practice.
For proof, just ask employees of Van Kampen.
“Sure we had a lot of sour faces on the Van Kampen side,” said Douglas B. Gehrman, senior vice president of human resources at Van Kampen American Capital, the merged company. “But if we’d put their plan in place for everyone, it would have cost a couple of million dollars more a year.”
Nor are companies’ priorities likely to change any time soon. In this tight job market, few companies fear that disgruntled employees will jump ship. “To be very blunt, having unhappy employees is not as great a concern in mergers as people like to think,” said Joseph M. Sabounghi, vice president of Actuarial Sciences Associates, the employee benefits consulting subsidiary of AT&T.;
Employee benefits take a back seat in another way. Except for those of top executives, benefits are rarely a negotiating point during merger talks.
“The days of paternalistic corporate owners or boards saying, ‘I won’t sell if you don’t take care of my employees first’ are long over,” said Michael E. Sass, a principal at Foster Higgins. “The design of benefits plans is just not an issue in negotiation now.”
And decisions about their scope are often a long time coming after the deal is done. That means that employees of Chase and Chemical, Disney and Capital Cities, CBS and Westinghouse and other merging enterprises can wait in angst for months.
Nor can they always look to other mergers for a hint of what to expect. In mergers, industry or geographic precedents mean little when it comes to benefits.
But there are a few patterns. If the acquiring company is much larger than the acquired one, and has a less rich benefits plan, it is often the larger’s plan that will survive. The reason, of course, is the great cost of raising all the bigger entity’s workers to a better plan.
Similarly, when “hot” young companies are merged into firms that grow more slowly, often the new parent leaves the existing plans in place. The reason is the radical difference between the types of people the merging companies employ, and the financial incentives that motivate them.
In old-line, paternalistic industries like telephones and insurance, companies traditionally coveted employees who were interested in security and a steady income - both for the firm and for themselves.
Thus, the companies have offered rich benefits and protective seniority systems rather than high salaries and bonuses.