Business

Pay rises at single-family offices lag other sectors

Pay rises at a majority of US single-family offices struggled to match other sectors in 2021. To counter this, a clear majority of pay rises for executives at large SFOs outpaced the market and their long-term incentives are steadily growing in size and scope. But is that enough to attract talent? 

Botoff Consulting’s 2021 Single Family Office Compensation Report, published with Morgan Stanley, confirms 58% of executives at SFOs worth $1 billion-plus received pay increases which outpaced the broader US market. But the proportion of executives paid an increase fell to 43% across the entire universe, including smaller SFOs. 

As regards all staff, no more than 37% of SFOs beat the market, although 52% of large ones did so. In all cases, the pandemic could have been an issue. Family office reserves are not necessarily as large as those in the financial sector.

Around 87% of bonuses were the same, or higher, than the previous year. The equivalent of 55% of the SFO universe is now committed to long-term incentive plans for their executives, rising to 70% for family offices worth $2.5 billion. 

Total compensation of $800,500 paid to a median family office CEO is similar to the equivalent at portfolio companies backed by private equity, according to Heidrick & Struggles. This compares to $2 million for CEOs at family offices worth more than $2.5 billion.

David Rubenstein, founder of private equity firm Carlyle Group, has warned family office principals do not offer the profit-sharing incentives enjoyed by partners at private equity firms (Family Capital 23 February). 

Tanya Lutyens of Lutyens Advisory says the comparison is misleading: “You aren’t comparing apples with apples when you compare remuneration in private equity houses with family offices. 

“But there’s no doubt PE executives are exceptionally good at extracting rent. In the US, we have seen the development of carried interest and co-ownership to incentivise key members of staff. And we are discussing ways to offer similar structures in Europe.”

The Botoff report, published in November, surveyed 217 US family offices between April and May 2021. Around 46% of the family offices own assets worth more than $1 billion.

Family members chose not to reward themselves generously: “It is not uncommon for family members to be paid two thirds that of non-family CEOs, or even less.”

Around 83% of family offices gave their executives a pay increase last year, with the rest not getting one and 20% of executives at family offices worth more than $2.5 billion receiving a pay rise of 10% or more. 45% of overall bonuses stayed the same while 14% fell and 42% went up. 

Around 68% of long-term incentive contracts offered deferred compensation. Opportunities for top executives to co-invest in deals with their employer amounted to 46% of the total. Headhunters confirm they can be offered cheap loans to participate. Carried interest was offered in 33% of contracts. According to Botoff, family offices stand ready to offer contracts to woo talent, with 70% of SFOs worth $2.5 billion or more using them.

The non-family median for total direct CEO compensation was $800,500 for the entire sector. Family offices worth $1 billion to $2.5 billion paid $1.1 million to CEOs: data is based on 2021 remuneration, with incentives paid for 2020 performance. Family offices worth $2.5 billion-plus paid median compensation of $2 million.

For the broader universe, chief investment officers were paid a median of $963,000, just above $962,000 for the $1billion to $2.5 billion bracket and $1.5 million for SFOs worth $2.5 billion-plus. The pay would reflect investment performance.

But the partners of private equity firms share massive rewards from a much larger stream of deals, suggesting that current long-term incentives may not be enough. 

Steve Schwarzman, chief executive of Blackstone, recently disclosed income of $1.1 billion for 2021. Two other executives received more than $160 million following a surge in profits at the private equity firm.

Analyst Ludovic Phalippou has calculated that carried interest for private equity executives prior to 2015 totalled $370 billion. He is critical of private equity’s underlying performance and calls the sector a Billionaire Factory.

In a podcast hosted by Tyler Cowen, Carlyle Group’s David Rubenstein said private equity firms have succeeded through its partnership structure: “You want to share the wealth. That’s how you attract the very best talent.” He said this could not be matched by family offices.

His remarks have sparked a flurry of comments. Brian DeLucia, head of Arrivato family office, said through Linkedin: “There are a lot of family dynamics that happen behind the scenes and unique personalities that affect decision making.”  

Principals, for example, may choose to abandon deals at the eleventh hour, or renegotiate terms, as a result of which professionals lose their bonus. Or they may leave departments too thinly staffed to tackle every deal.

But one respondent said the private equity approach was too aggressive compared to family offices, whose business is intergenerational rather than profits centred. The Botoff report confirmed that investment decisions at more than half the family offices are informed by ESG considerations.  More than 14% of assets are invested sustainably. 

Another respondent said family offices struggled to recruit talent, not because of pay, but because most people don’t know about them: “I would guess that 95% of people don’t know working with a family office is an option.”

Paul Carbone, managing partner of Pritzker Private Capital, was relatively upbeat: “Given all that family capital has going for it, if family offices do provide the right incentive structure, they will attract the best talent.”

Entrepreneur John Tchelingerian says the best talents will always want their freedom, and the best way for family offices to profit from this is by investing in their ventures.

Rajaa Mekouar, managing partner at Calista Direct Investors, says professionals are attracted to family offices for other reasons: “They will value trust and alignment more than any financial upside or incentive.”

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