PER’s compensation conversation, by Oliver Gilkes

14 October 2019 | Oliver Gilkes, Senior Consultant

 

 

Last Friday, contributors to our UK Private Equity Investment Professionals Compensation Report joined us to discuss the results over breakfast. The conversation around the table covered working out the right level of base compensation, retaining and promoting high performing individuals and ensuring that carry is rewarded to incentivise the team. Our clients found it valuable to share compensation practices with peers and ask questions in a confidential space.

Compensation in private equity and venture capital

One issue at the top of minds was how to know the right figure to put on the table for someone that you really want to hire.  For analysts and associates, this is driven by the pay in investment banks. For more experienced hires, compensation is more dictated by fund size.  The complications come with carried interest calculations. Fortunately, PER’s contributor survey has good data on carried interest awarded at different levels and by different fund sizes.

When it comes to millennials, the message coming from our clients was clear: beware of discrepancies in pay because people are more inclined to talk about compensation packages than they were in the past.  As well as internal chatter, discussions around compensation also go on externally with websites like Glassdoor giving industry insight.

All the clients commented that having reliable data like our compensation report is crucial, not just for potential hiring, but also for internal benchmarking and promotions.

Pay rises and bumps in bonus are an important way of retaining good performers but how structured should these increases be? While all agreed that success should be rewarded, some issues were raised. Firstly, linking bonus percentages to the performance of an investment makes sense, but it isn’t straightforward and doesn’t reward those working in challenging but crucial portfolio management roles. This approach also doesn’t reward the sometimes-prudent decision to say no to a deal. Secondly, people at the same level and with the same title expect to be paid similarly. A transparent performance management system is needed to justify incremental increases in base and bonus that are unaccompanied by promotion.

Of course, people progress at different rates. One client advised paying all their new cohort the same on entry. The top performers would tend to emerge over the next couple of years so that the reasons for differences in compensation at a later stage become clearer to both employer and employee. Don’t be scared of rewarding your top performers and promoting early, said one client who had a star emerging in the team and was keen to retain and incentivise him.

Our Managing Director, Gail McManus, warned that the market also becomes interested in your associates as they are being promoted to senior associate or VP – generally people with three to five years of experience. These people are attractive to other firms and recruiters will start approaching them. Show your stars a clear path for progression if you want to retain them, she advised.

Carried interest has always been an emotive and slightly opaque topic at any private equity firm. Our clients were impressed by the level of information around carried interest awards by fund size and level in our survey.   

There was also lively debate about when to award carry as cash today can be more important to analysts and associates.  However, some clients firmly believed that awarding carry from day one ensured alignment and integration into the team and the ethos of the fund.

For the first time this year, we included data about maternity / paternity provision in our report. Our clients found this useful. A healthy debate ensued around carried interest during times of parental absence. The overwhelming opinion was that encouraging your investor to return was worth more in the long run than holding anything back during periods of absence.

Our breakfast was a fantastic opportunity to learn about the questions and considerations that go into hiring, progressing and rewarding private equity investors. It was clear from discussions that some industry norms are changing as a new generation with differing priorities rises through the ranks. We’ll keep in touch with our contributors going forward to keep an eye on these trends and how they are affecting compensation at all levels in private equity.

We only offer access to our reports to firms who have contributed their data. If you would like to take part in our survey, contact William.Tomlinson@PER-people.com.

About the author

Oliver joined us in 2008 and covers the UK, Europe and the Middle East. His focus includes private equity, private credit, real estate and infrastructure for sovereign wealth funds, family offices and GPs.

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