Monday, February 11, 2019

Adopting Pay-For-Performance Compensation Plans At Family Offices To Recruit And Retain Talent


Most public companies have developed long-term compensation programs that measure performance metrics over time (often over three years), and that typically reward senior executives for meeting clearly identified benchmarks. These plans seek to align the interests of employees with those of owners (i.e., shareholders in the public markets).   

Alignment, along with the retentive value of long-term incentives, has proven to be a successful way to ensure “pay-for-performance” and continuity within an organization.

But what about the compensation plans within private companies, including family offices? Whether led by a family member or another governance structure, a comprehensive compensation program that aligns stakeholder interests is critical to a successful organization. Following the public company model, rewarding key executives for value enhancement is the cornerstone of a pay-for-performance approach to compensation planning. Pay-for-performance clearly incents internal stakeholders and aligns the interests of the family office in providing the capital for those who are directing its investments (and upon whose performance the compensation depends). Further, pay-for-performance has become an integral tool for family offices to attract and retain top talent.

Most compensation programs have a three-pronged goal to incent, motivate and retain. Prudent investment, coupled with a properly structured compensation program, enables organizations to satisfy those three prongs because the ability to tie compensation directly to profitability incents and motivates and is often an expectation of top talent. The long-term nature of many family office investments fosters retention.

Here are some key considerations and best practices for the development of compensation plans that enable family offices to engage and retain top level talent.

Compensation factors

  • A well-thought-out compensation structure for executives comprises three elements: base salary, annual bonus, and long-term incentive plans (LTIPs):
  • Base salary. Seemingly obvious, but meaningful base compensation rewards a professional’s time and efforts since, without guaranteed success of every initiative/transaction, compensation cannot be solely tied to successful outcomes. Otherwise, most professionals will seek to limit risk.
  • Annual bonus. Although annual bonuses tend to be discretionary (see chart below), annual bonuses are useful if there are certain specific objectives that leadership would like to see achieved.  For example, specific HR or operational objectives are common.
  • Long-Term Incentive Plans (LTIPs). These plans intend to incent and retain talent by enabling them to create wealth alongside the family through metrics that align professionals with owners.  More recently, family offices have begun to allow (or even require) their senior-most executives to co-invest (with their own funds or funds lent by the family office), which cultivates a sense of ownership and further aligns the interests of all parties.
  • Vesting. Due to the long-term nature of successful initiatives/transactions, family offices often require several years of vesting even after value has been created.




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