Ways to align staff with principals – pay at family offices and more

Family offices are increasingly offering their staff performance-related pay and long-term incentives according to a survey sponsored by Morgan Stanley.

Remuneration is often paid at the behest of wealthy families, but competition for external talent, particularly for investment, means discretion does not dominate the scene as it once did.

Families also offer staff loans so they can gear up their returns

Some family offices are allowing staff to co-invest in their deals and lend them money to do so.  Others offer performance pay through a carried interest, despite criticising its use by private equity firms. Phantom pay is on offer to smart people, along with non-recourse loans. To compete for talent, family offices have little choice.

According to Valerie Wong Fountain, head of signature access at Morgan Stanley: “Understanding not only the competitive landscape, but also the trends driving the landscape, is critical to recruiting and retaining the best past talent.”

According to the Morgan Stanley survey, median pay for chief executives at family offices worth beween $1 billion and $2.5 billion has risen $1.3 million, between a bottom decile $665,000 and a top decile $2.3 million. But this remains less than you can expect in the financial sector.

The survey draws on data from 300 US family offices, plus input from Fidelity Family Office Services, Mack International and McNally Capital. It was prepared by recruitment adviser Botoff Consulting.

It says families will pay what it takes to get staff in key metropolitan areas. New York and San Francisco are currently achieving a 15% to 20% premium.

Around 40% of family offices report pay increases of between four and ten percent, against a national average of three percent

The survey says 87% of respondents review, and adjust, pay on an annual basis, as do 95% of $1 billion-plus family offices. It adds: “The use of formalised incentive plans is growing in order to stay competitive.  If candidates can’t get comfortable with the structure and nature of compensation, the family is unlikely to get a second chance.”

Drivers for pay overlap. But 67% of family offices take account of individual performance when settling awards, just ahead of the 65% who still use discretionary considerations. Market data is an influence for 42% of decisions.

A higher proportion of family office bonuses, equivalent to 83.4% of the total, were paid over twelve months, against 80.1%. This increase was mainly driven by a sharp hike in the payment of bonuses by smaller family offices.

Bonus awards were based on discretionary factors in 64% of cases.  But discretionary decisions can be wrapped around more formal assessments. Around 27% of family offices admit to an overt mix of both.

A separate survey of 156 family offices by Fox Family Office and Grant Thornton published in 2018 found that 77% of family offices respondents used a methodology that reinforced subjective decisions.

Around 56% of respondents report the use of long-term incentive plans, rather higher than the 34% recorded by Grant Thornton.  The difference between the surveys reflects the wide range of decisions at different family offices, although the broad trends are similar.

In 40% of cases, families incentivise their staff by allowing them to co-invest with them on a personal basis. Around 88% of $1 billion-plus family offices use this approach. Families also offer staff loans so they can gear up their returns.

According to the survey: “Many families view this as an excellent way to align interests and may even require that key executives and investment staff invest along with the family.”  

Despite their renowned dislike of carried interest performance pay in the private equity world,  27% of family offices offer such arrangements to staff. The ratio for $1 billion family office is 58%.  Deferred pay is also common.

Vesting periods of 3 to 5 years for incentive plans are typically lower and some do not require any at all.  The survey warns: “This is a gap from what is considered best practices and should be viewed an opportunity to better align compensation with family goals.”  

It adds that staff often expect to be given a chance to realise profits from co-investment opportunities more quickly than the patient capital employed by family offices.