M&A Compensation Due Diligence: The Checklist PE Firms and HR Leaders Actually Need
By Stephen McGillivray | The Barksdale Group
When I led the compensation integration for a defense contractor's acquisition of a 520-person engineering firm, the first 48 hours looked the same as every acquisition I had worked on before. The deal had closed. The attorneys had gone home. And the HR team was staring at a spreadsheet of names, salaries, and titles that nobody had seriously touched during due diligence.
That is not unusual. In most middle-market acquisitions, M&A compensation due diligence gets three things: a headcount count, a benefits summary, and a line in the financial model for "integration costs." What it rarely gets is a real examination of what the target company's pay practices will actually cost you once the employees become yours.
This post is the checklist I use. It covers seven categories, explains what to look for in each, and flags the three failure modes that end up on post-close autopsy reports.
If you are a PE operating partner running diligence on a platform acquisition, a corporate development team about to close an add-on, or an HR leader who just got handed an integration with 60 days to harmonize, this is for you.
Why Compensation Due Diligence Gets Skipped
The honest answer is that it lives in an awkward gap between functions. Financial due diligence focuses on revenue quality, EBITDA adjustments, and working capital. Legal DD focuses on contracts, litigation, and employment agreements. HR DD, when it exists at all, typically reviews benefits costs, headcount, and org structure.
Nobody owns the compensation file.
The result is that acquirers routinely discover, post-close, that they have inherited a salary structure built for a different company at a different point in its growth history. Sometimes the target's top engineers are paid 20% above what the acquirer pays comparable engineers. Sometimes the sales compensation plan has uncapped accelerators that will cost three times what the model projected in a good year. Sometimes the target has been papering over pay equity gaps for years and the new entity is now on the hook.
None of this is unresolvable. All of it is far cheaper to find before the deal closes than after.
The 7-Category M&A Compensation Due Diligence Checklist
1. Grade Architecture and Salary Structure
Request the target's full grade and salary range structure, if one exists. Many middle-market companies at the 200-to-1,000-employee range are operating without a formal salary structure, which means their pay practices are a negotiated artifact of every hiring decision ever made.
What to look for:
- What percentage of employees are above their range maximum (if a structure exists)?
- What percentage are below range minimum?
- What is the midpoint-to-midpoint progression between grades? Anything below 8% creates compression between levels.
- Are the ranges anchored to actual survey data, or are they internally constructed and outdated?
An acquired company with 20% to 30% of employees above range maximum is carrying a significant cost liability. Those employees become "red circles" at close. You cannot cut their pay. But you will stop giving them merit increases, which creates retention risk for the exact people you just paid to acquire.
2. Variable Compensation Obligations
Pull the target's bonus plan documents and any sales compensation agreements. This is where acquirers most commonly get surprised.
What to look for:
- Are there uncapped accelerator provisions in sales plans? At what multiple of target do they trigger?
- Are there discretionary bonus pools with no formal target payout methodology?
- What is the current accrual for bonus obligations? Is it on the balance sheet?
- Are there multi-year long-term incentive plans (phantom equity, profit interest plans, deferred cash) that survive close?
- For PE deals specifically: does the management team hold any equity-equivalent instruments that will need to be addressed in the transaction?
Uncapped or poorly documented variable pay is a budget exposure that does not show up in a headcount model. Find it in DD, not in Q2 after the first good quarter.
3. Change-in-Control and Severance Provisions
Most employment agreements and offer letters at the director level and above include some form of change-in-control (CIC) protection. These trigger on close.
What to look for:
- Which employees have employment agreements with CIC provisions?
- Are the CIC benefits single-trigger (they receive benefits simply because the deal closes) or double-trigger (they must also be terminated or resign for good reason)?
- What are the potential severance multiples? Two-times salary and bonus for five executives is a real number.
- Do any agreements include gross-up provisions for excise taxes under Section 280G? For larger deals, model the 280G parachute calculation early.
In platform acquisitions with PE sponsors, managing CIC exposure at the management team level often becomes part of deal structuring. That conversation needs to happen before term sheet, not during integration.
4. Executive Compensation and Retention Risk
The target's senior team is often the reason you are acquiring the company. If your DD process surfaces that three of the five executives will be at market in 90 days because their current comp is well below competitive, you have a retention problem that starts the moment they learn what the acquirer's employees earn.
What to look for:
- Benchmark the top 10 to 15 employees against relevant survey data. Do not rely on the target's own benchmarking.
- Identify which executives are critical to the integration plan versus redundant. This shapes both retention design and severance exposure.
- Flag anyone on a below-market equity grant with a cliff approaching post-close. These are departure triggers.
A retention bonus program costs money. It costs less than losing the integration leader six months into year one.
5. Benefits Liabilities and Total Rewards Obligations
Benefits due diligence is usually handled separately, but several benefits items have direct compensation implications.
What to look for:
- Accrued and unused PTO. Depending on the state, this may be a balance sheet liability that transfers. California and a handful of other states treat accrued PTO as earned wages. Understand the exposure by state.
- Non-qualified deferred compensation plans. These are unfunded liabilities and they transfer with the business.
- Any company car programs, housing allowances, or perquisites that are embedded in total compensation calculations and will affect harmonization.
6. Pay Equity Exposure
This category is increasingly relevant as pay equity legislation expands at the state level. An acquired company's pay equity gaps become the acquirer's pay equity gaps at close.
What to look for:
- Run a preliminary regression of the target's salary data against job family, level, and tenure. Even a simple analysis at DD stage will surface structural gaps.
- Review any existing OFCCP audit history, EEO-1 filings, or state pay data submissions.
- Flag any role categories with significant unexplained variance by gender, race, or ethnicity. These are not just legal risks. They are EEOC charge risks post-close.
For PE acquirers with a portfolio company that will eventually seek investment from institutional LPs or pursue an IPO, undisclosed pay equity gaps create downstream valuation risk. Find them now.
7. GovCon and Regulatory Compensation Compliance
If the acquisition target is a government contractor, add this layer to every other category above. DCAA and FAR 31.205-6 impose specific requirements on how compensation is designed, documented, and defended.
What to look for:
- Has the target had an incurred cost audit? What were the findings?
- Does the target maintain a compensation file with a defined philosophy, survey sources, and reasonableness documentation?
- Are there any employees with compensation above the FAR 31.205-6(p) cap on senior executives? (2025 cap: $671,000)
- Are service contract employees covered under the McNamara-O'Hara Service Contract Act? Wage determinations must be applied correctly at close or the acquirer inherits the compliance gap.
I wrote a full guide to DCAA compensation compliance separately. If the target company holds government contracts, read that post alongside this checklist.
The Three Post-Close Failure Modes
In every M&A compensation integration that goes sideways, the root cause traces to one of three failure modes.
Compression. The target's employees are paid more than comparable employees at the acquirer. Post-close, the acquirer cannot raise its own employees' pay to match quickly enough, and cannot reduce the acquired employees' pay at all. The result is a two-year period of internal inequity, suppressed merit for the acquired population, and resentment in both directions. This is entirely predictable from DD data and entirely preventable with a harmonization budget built into the deal model.
Retention loss on the wrong people. Integration plans routinely identify which executives are "critical." What they miss is the two or three levels below: the principal engineer who knows the product roadmap, the director of contracts who has the government customer relationships, the comp analyst who understands the inherited pay structure well enough to maintain it. These people are not in the integration model. But their comp is often below market because growing companies underpay individual contributors. When they figure out what the acquirer pays for the same role, they leave. Build retention analysis deeper than the org chart.
Inherited compliance exposure. Pay equity gaps, FLSA misclassifications, and DCAA documentation failures do not pause at close. They transfer. In a GovCon deal, this can mean inheriting audit liability from prior contract years. In any deal, a hidden pay equity gap that surfaces 18 months post-close looks like it happened on the acquirer's watch. It may not have, but proving that in an EEOC inquiry is expensive and slow.
The Integration Timeline That Follows DD
Due diligence creates the risk inventory. Integration execution is what you do with it.
A practical sequencing framework for compensation:
Pre-close (final 30 to 60 days):
- Complete the DD checklist above
- Quantify compression cost and model it into integration budget
- Identify CIC and severance obligations and ensure they are reflected in deal economics
- Design retention program for critical employees (typically 18-month retention window)
Day 1 to Day 90:
- Communicate total rewards philosophy to acquired employees
- Map all acquired roles to the acquirer's job architecture
- Identify and document red circles (employees above range) and green circles (employees below range minimum)
- Deliver retention bonus agreements to critical employees
Day 91 to Month 12:
- Begin harmonization of salary ranges where structures diverge
- Integrate acquired employees into standard merit and bonus cycles
- Close any pay equity gaps identified in DD
- Complete GovCon compliance documentation review if applicable
Building this plan starts in DD, not at close. If you have not modeled the integration cost before the deal signs, you are building the road while driving on it.
What Most Mid-Market Companies Actually Need
Formal compensation due diligence is standard practice at the large-deal end of the market. It is far less common in middle-market transactions, which is where most of the integration failures I described above actually occur. A target at 400 employees rarely has a documented salary structure, a current benchmarking analysis, or a retained employee record on variable pay obligations. That information exists somewhere. It takes a practitioner to go find it and translate it into deal risk.
If you are a PE operating partner, a corporate development team, or an HR leader heading into an integration and you want help building the compensation risk inventory, that is work The Barksdale Group does. CompForge's M&A integration module covers the full lifecycle from DD support through harmonization delivery.
For a fuller picture of what compensation infrastructure looks like when it is built right, start with the first post in this series.
Read: What Is Compensation Infrastructure? (And Why Most Mid-Market Companies Don't Have It)
Stephen McGillivray is the founder and principal of The Barksdale Group LLC, an independent compensation consulting firm based in Arlington, VA. He has led compensation work across defense contracting, technology, healthcare, and professional services for 16+ years. The Barksdale Group's CompForge program builds full compensation infrastructure for mid-market companies in 10 weeks.
