Having watched competitors get burned after acquisitions, Chase Manhattan Corp. has turned to an unusual vesting arrangement to discourage key employees of Hambrecht & Quist Group from leaving the investment bank.
Daniel H. Case 3d, chairman and chief executive at Hambrecht, said a plan it has agreed to is notable because it would activate nonsalary compensation, such as stock options vesting, at the one-year anniversary of the merger. That is sooner than if there were no merger, but later than provided for in most merger deals.
Chase is expected to acquire the investment bank in mid-December.
Other mergers, such as Deutsche Bank's acquisition of Bankers Trust Corp., allowed vesting to start soon after the merger. That encouraged Bankers Trust management to stay until the merger was completed, but it also made it easy for some to leave soon after the deal was sealed, according to compensation specialists. A Deutsche spokeswoman declined to comment on the plan.
"The biggest advantage we have is that we've designed a program that won't cash our partners out at closing," said Mr. Case. "There's no one date when everyone wants to leave."
Chase, which in late September announced the agreement to buy the San Francisco equity specialist for $1.35 billion, is trying to make sure it will not lose the talent it bought to form the core of its nascent equities platform. When the deal was announced, it said it had reserved $200 million to retain staff, augmenting a program Hambrecht already had in place.
"Chase has been so cautious in making this acquisition that I would expect them to come out with some model examples of retention," said Lee Pomeroy, a consultant who specializes in compensation issues for Egon Zehnder International.
Still, Chase faces a challenge in keeping Hambrecht's stars. "You can bet a lot of headhunters went wild when that deal was announced," Mr. Pomeroy said.
Firms need to balance keeping talent happy and giving them too much money all at once, a tactic that can backfire, when employees walk away with full pockets. "If the compensation package is totally accelerated, there is no motivational carrot for the individual to continue successfully working at the firm," notes Diane Posnak, a compensation specialist at Pearl Meyer & Partners Inc.
Another reason Mr. Case said the program should be more successful than those at other recently acquired investment banks is that it is of a longer duration and reaches more levels of employees than is typical.
Key staff would be given monetary incentives over a four-year period, and the retention plan moves beyond senior management to include vice presidents and every published research analyst. Hambrecht and Chase have also arranged that some employees be guaranteed a minimum level of compensation during the first year.
Analysts familiar with executive pay packages said that though Hambrecht is not the first to have a four-year program, a plan of that duration is unusually long. Pay is not the only issue both firms will need to resolve. They will also need to meld Hambrecht's San Francisco investment bank culture with that of an East Coast money center bank.
Mr. Case, who has spent his entire banking career at Hambrecht & Quist after starting as an associate in 1981, sidesteps this issue. Cultural differences "will be solved by winning," he said.
Ahead of the actual merger of Chase's existing investment banking platform with Hambrecht, one part of the San Francisco boutique has already been retained -- its name. Late last week, Hambrecht and Chase decided that the new firm would be called Chase H&Q, a division of Chase Securities, when the merger closes.
Mr. Case acknowledges that the Hambrecht acquisition is not the last for Chase as it seeks to become a top-tier investment bank. "This transaction is transformational for the bank in the new economy -- not for global investment banking."
