Business

Pay and family offices – skin in the game approach for executive compensation gains popularity

A growing number of US family offices are allowing key executives to acquire skin in their game, according to research by the remuneration adviser Botoff Consulting.

Its survey, published in December, found that 60% of respondents allowed their executives to co-invest, against 46% disclosed by a survey published by US-based Botoff in 2018. But pay and conditions will need to improve in other ways to be sure of attracting talent to the sector, the report added. 

Family offices tend to be wary of the personal ambitions of their staff and like aligning their interests as closely as possible

The survey shows there is a wide disparity in pay between family offices of similar size and Botoff says annual pay increases need to be competitive.

The latest survey has used responses from 323 firms, reporting data on 491 of their executives in the US. Botoff researched it with the Forge Community, a peer-to-peer family office community.

Around 54% (against 40% in 2018) of family offices worth between $500 million to $1 billion supported co-investment, against 70% (53%) for those with $300-$500 million and 66% (38%) for  $100-300 million.   

Co-investment at family offices worth $1 billion-plus slipped by four percentage points to 56%.  But this reflects changes in the respondent base and the leadership of large family offices in prior years. 

The retention of a growing number of directly-employed teams by family offices contributed to the increase. Family offices tend to be wary of the personal ambitions of their staff and like aligning their interests as closely as possible.

The overall level of deferred compensation rose from 28% to 56% in 2019, reflecting changes in the respondent base, with the proportion, at 20%, was lower for family offices worth less than $100 million.

The payment of tax-efficient carried interest paid to executives, similar to the private equity sector, saw a four percentage point rise to 42% (38%).

Leverage offered to staff through recourse loans rose from 12% to 20%, while the proportion of family offices offering non-resource loans was roughly unchanged at 10% (9%).

According to Botoff, around 44% of family offices used long-term incentive plans, partly thanks to their use by $1 billion-plus family offices. 

Fewer than 50% of family offices employ a best-practice incentive plan, with 53% of families preferring to pay bonuses at their discretion. According to Botoff: “Use of discretionary bonuses is a missed opportunity for goal and performance alignment.” 

But Botoff adds that more family offices are using market data to set pay. New hires tend to be significantly better compensated when compared to previous incumbents. No more than 45% of chief executives boast MBA qualifications, against 81% of chief investment officers

Nearly 80% of family offices increased executive pay which was frequently in line with the US average of 3.2%. A large number of executives received a 4% increase.  However, 19% of family offices had failed to grant an increase in pay over the last twelve months. 

Around 40% of family offices with less than $100 million have been dragging their feet. According to the survey: “Family offices will need to keep pace – not just with overall changes in the US market, but with each other – to not fall behind in base salary practices.”

Botoff notes a broad dispersion in executive pay. Starting at the bottom,  tenth percentile CEO direct compensation for $1 billion-plus family offices is $545,000, against $800,000 for the median and $2.4 billion for the 90th percentile.  Family offices worth $500 million to $1 billion pay a tenth percentile $390,000 a median of $650,000 and 90th percentile $1.25 million. 

The tenth, median and 90th percentile CEO compensation for a $100-300 million scheme would be $230,000, $383,000 and $658,000. A “fairly significant” number of family members do not receive much compensation, if any, and have been removed from the analysis.

Just under 40% of non-family executives have been with family offices for less than five years, suggesting a higher degree of job turnover than you might expect from a stable community. Family executives enjoy much longer tenure of office.  

Family offices can offer generous benefit packages to non-family members, including work/life benefits – even pet insurance – although they are parsimonious with 401k retirement plans, where 79% of family offices make contributions against 95% from corporations.

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