Family offices are facing a fierce battle for talent in today’s competitive landscape. As these private investment arms of single families continue to grow in size and number, they are competing directly with private equity firms and venture funds for top staff. In response to this challenge, family offices are revamping their compensation plans by offering equity stakes and profit-sharing opportunities to attract and retain top talent.
The Shift Towards Equity and Profit-Sharing
In the past, family offices primarily relied on salaries and bonuses to compensate their employees. However, in a bid to align incentives and provide employees with more upside, many family offices are now incorporating equity and profit-sharing components into their compensation packages. This shift is not only aimed at offering competitive compensation but also at fostering a sense of ownership and alignment with the family’s objectives.
According to Patrick McCurry, a partner at McDermott Will & Emery LLP, there are three common ways that single-family offices are structuring their compensation plans to include equity and profit-sharing options. The first model involves offering employees a profits interest, which allows them to share in the upside of a deal or a basket of deals. This effectively ties the employee’s compensation to the success of the investments made by the family office.
Another popular model is co-investment, where employees have the opportunity to invest their own money alongside the family in a specific deal. This approach not only aligns the employee’s interests with those of the family but also encourages them to make prudent investment decisions, as they have a personal stake in the outcome. By combining co-investments with profit shares, family offices can provide employees with both upside potential and downside risk.
Phantom Equity as an Alternative
For family offices that have complex structures that make it difficult to issue profit shares or co-investments, phantom equity can be a viable alternative. This involves offering employees notional shares of a basket of assets or a fund to track performance without actual ownership. While phantom equity provides employees with a deferred tax-free benefit, it is usually taxed at ordinary income rates, making it less attractive in the long run.
Flexibility in Designing Pay Plans
One of the advantages that family offices have is the flexibility to design customized pay plans that suit their specific needs and objectives. However, in order to remain competitive in the war for talent, family offices need to adapt to the evolving landscape by offering a variety of equity-based compensation options. The trend towards equity and profit-sharing is gaining momentum, with more family offices recognizing the importance of aligning incentives to attract and retain top talent.
The changing landscape of the family office industry is giving rise to new and innovative compensation strategies. By incorporating equity stakes and profit-sharing arrangements into their pay plans, family offices are not only able to compete for top talent but also promote a culture of ownership and alignment within their organizations. As the competition for skilled professionals intensifies, family offices that embrace these compensation trends will be better positioned to recruit and retain the best talent in the industry.