We were asked to lead a virtual roundtable with ACG New York to discuss Executive Compensation and the event was a huge success.
The virtual discussion attended by more than 40 Family Offices and Private Equity firms tackled the topics of dispute resolution and talent retention, two of the biggest problems plaguing Family Offices which as we presented, can both be corrected by using a different compensation structure.
We surveyed our guests ahead of the event and discovered that more than a third of Family Offices have had a compensation related dispute in the last 12 months (37%) and while a further 30% of guests were keen to take away an understanding of how to both solve these disputes, 80% were most concerned with finding the right type of compensation.
We discussed the different compensation types used within Family Offices today with interesting discussions around Long-Term Incentive Plans (LTIP), discretionary vs formulaic bonuses and the importance of aligning compensation with purpose. Above all, we emphasised that while benchmarking your compensation is key, money must not be the only driver in retaining talent.
We offered insights from our Global Compensation Benchmark Report which outlined that America is the most-mature Family Office Marketplace with 57% having more than 10 years in operation behind them and more than 20% employing over 10 people. On the other side of the world sit Middle-Eastern Family Offices, a considerably new marketplace where 65% of CEOs are still family members. In Europe, this figure is just 29% showing the openness to outside expertise in more mature marketplaces.
Of course, we then went on to discuss compensation on a global scale and identified how the age of a Family Office, its size, structure and Assets Under Management (AUM) have a huge impact on compensation structures.
While the higher the AUM, the higher a Family Office CEO might be paid – this isn’t always the case with Investment Staff and a trend we noticed is actually, CIOs working with under $200M in AUM can often be paid more than those with more than $2BN. This is when we come in to ensure compensation is correctly structured in a way where both the Family Office and staff benefit and most-importantly, they are retained and motivated.
We also emphasised that once you have seen one Family Office, you have seen one Family Office. With no Family Office the same, it is extremely hard to benchmark without global primary data – something we have spent more than a decade building for this very reason.
For instance, we discussed the real-life example of a CIO employed to generate wealth to fund the Family Foundation. The Principal, only interested in Philanthropy, understandably did not see the benefit in glamourizing or incentivising aggressive risk-taking and so, this CIO, who in another Family Office would see a much higher compensation, was given a basic salary. This was not motivating or rewarding the CIO and so we helped the Principal structure a high fixed cost, regardless of upside. While this would in no way be applicable to many Family Offices, in this situation it was ethically right and retained the CIO where four years later he remains today.
Offering another real-life case study, we discussed a CIO who over 15 years developed an entire investment portfolio which was returning 10% interest a year – much higher than the average of the time. Despite this, he realised when returning less interest, he was receiving a higher bonus and naturally became less motivated to generate a higher return. Bonus day came again and despite making 3% interest, his bonus was considerably higher than the year before. We were brought into help this CIO and his Principal create a bonus structure that would benefit the Family Office and its talent and realised that when it came to Bonus Day, it was down to the Principals’ mood. Alongside this lack of standardisation sat the realisation that income was also used for personal investments and passion projects which had a significant impact on the CIOs motivation.
You can take our word for the fact that given this CIO’s portfolio and ability, they were not guaranteed to find a replacement. Three years later and that CIO is still there, content with a new compensation structure.
We see this regularly, especially when a Family Office is formed off the back of a successful Family Business. For instance, we helped a South American Family Office with a dispute some years ago.
The family was made of four siblings, the eldest was the star player. He had turned the family blueberry farm into a $300,000,000 success having started with $3,000,000. He was hugely successful and received the compensation to match but upon forming a Family Office, his compensation hadn’t changed despite the portfolio now involving several other liquid investments – out of his control. The surplus cash generated from the farm was just one portion of the pie and it had presented itself in a dispute between the family members and then the external staff hired to manage the portfolio. We carried out a thorough investigation, interviewing all siblings, the CEO, the family. Had this star-player sibling been replaced by a non-Family Member, he would have been on considerably less compensation.
When we support Family Offices with a compensation related dispute, we ask two questions:
- What is the main purpose of the Family Office?
- What is the structure of the Family Office in terms of portfolio, staff members, industries?
Both can play a huge part in compensation.
As we presented above with the CIO of a Foundation, if the purpose is philanthropic, aggressive risk taking might not be the best compensation incentive and the same rule applies if the purpose is wealth growth, endowment or to provide a purpose for future generations.
Similarly, the size of the organisation will play a huge part in this decision as if you are a CFO with a team of five underneath you, you can imagine your compensation structure would differ to that of a CFO who has responsibility for the running of the office. Equally, the types of investment, industry and even titles play a part. In the world of Family Offices, you could be a Finance Manager and be labelled a Financial Controller, Director, CFO or Accountant. Each title of course bringing with it a different compensation structure.
The most important thing to remember when compensating Family Office talent is to consider your own purpose and structure and above all, remember that money must not be the only driver in retaining talent. Not only are many executives not solely motivated by money but you need to find the right person who is aligned with your purpose and values, you need to ensure you make the role exciting and interesting and you must invest not just your money but your time and energy into showing your staff that they are valued, trusted and respected members of your team.
To read more compensation-related insights, please download the full Global Compensation Benchmark Report which you can find above and for a confidential conversation about how we can help you find the right compensation structure, retain your talent and resolve or avoid disputes, please do get in touch.