Private Equity industry – what does compensation look like

February 22, 2024

In the private equity industry, compensation packages are not one-size-fits-all. They’re as diverse as the firms themselves, shaped by a multitude of factors. Firstly, a firm’s history plays a crucial role. Established firms may have developed compensation structures over time, influenced by past successes, failures and regional benchmarks. On the other hand, newer firms might adopt more innovative approaches.

Ownership structure is another key determinant. Whether a firm is independently owned, captive (i.e. owned by an institution or family office) or listed on a stock exchange can significantly impact how compensation is structured. For instance, an independent firm might have more flexibility in designing compensation plans tailored to its specific needs and objectives, while a listed firm or a subsidiary of a parent company might need to adhere to certain guidelines.

Culture is a vital aspect that influences compensation. Some firms prioritise a team-based approach, where rewards are distributed based on collective performance, fostering collaboration and cohesion. Others may adopt a more individualistic culture, where compensation is tied directly to individual achievements.

Moreover, the source of funds can also shape compensation practices. Firms that rely heavily on institutional investors may face different expectations and pressures compared to those funded by high-net-worth individuals or family offices. The preferences and requirements of these investors can influence how compensation is structured, ensuring alignment of interests and risk-sharing.

In the private equity and venture capital space, the sheer diversity of firms leads to an array of compensation models beyond the traditional base salary, bonus, and carried interest (or “carry”). These models can include profit-sharing arrangements, co-investment opportunities, phantom stock, performance share, stock options, restricted stock and/ or equity in portfolio companies. However, it’s rare for a single firm to utilise all these compensation types simultaneously. Instead, firms select and adapt compensation elements based on their unique circumstances, strategies and objectives, aiming to attract and retain top talent while aligning incentives with long-term success.

Generally speaking, the remuneration of non-Partner level investment staff is more standardised than at the Partner level. Partners often have a more direct stake in the firm’s success and are therefore rewarded based on their contributions to generating profits and driving growth. This can result in a mix of compensation elements such as partner draws, profit-sharing arrangements, carry and other forms of equity participation.

Based on the 2023 MM&K PE/VC Compensation Survey results, it appears that in the UK, around 15% of firms choose not to provide annual bonuses to their Partners. In North America, however, this figure is significantly higher at 44%, indicating a notable contrast in compensation practices between these regions. One assumes this is because they operate a Partner profit sharing arrangement.

A vast majority of participating firms offer carry to Investment Partners. The use of carry further adds complexity to partner compensation. It represents a share of the investment profits earned by the firm, typically distributed in addition to base salary and other compensation. The allocation of carry can be highly variable and is often based on a Partner’s contribution to successful investments and long-term performance within the firm.

Approximately one-third of participating firms in both the UK and North America have established long-term incentive plans as part of their compensation packages. These plans often incorporate various forms of incentives, including performance shares, stock options and restricted stock. Typically, such long-term incentive plans are more prevalent among publicly listed firms, where they serve as powerful tools for attracting and retaining top talent, motivating employees to contribute to the company’s strategic objectives and giving a sense of ownership.

For more insights into the 2023 MMK-Holt Private Equity and Venture Capital European Compensation Report, please click here.

For more insights into the 2023 Holt-MM&K Private Equity and Venture Capital N. American Compensation Report, please click here.

For further information, please contact Margarita Skripina.

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