The latest trends in family office compensation

Jody Thelander founded the compensation data and consulting firm J. Thelander about 30 years ago, providing comprehensive data on private capital markets. She talked with Crain Currency about compensation trends at family offices and how they’re competing for top talent.

What are the trends you’re seeing in family office compensation?

[Family offices] are putting in more formality around carried interest because they want to attract and retain the people who can be successful on investments. 

How does that play out?

So the carried interest is typically structured like an 80/20 split — 80% from the limited partners and 20% from the general partners. But in this case, the family office is the LP, so they still have to set up a pool, although it may be adjusted down. Because the family office is not raising capital, a 20% pool may be too much. They also likely don’t have to contribute capital for their carried interest, since the family doesn’t want that. But they still want a long-term incentive that ties investment success to compensation.

That's what we're seeing. It’s all about the competition for talent. You’ve got to make sure that if you want good people, you also have to compete with compensation and sweeten the pot a little bit.

In our latest survey, we looked at the percentage of partners who received carried interest at family offices and venture capital firms. (See chart below.)

Did that not used to be the case? 

In the past, for nonfamily members, it was probably a base salary and some kind of bonus that was likely some kind of discretionary cash bonus. Now there’s much more formality in family offices. 

When you say formality, what does that mean in terms of hiring and compensation?

More formality around the structure of compensation using different levers  — base pay, target bonus and total cash. If there’s a target bonus or a bonus structure, especially for midlevel and junior employees, they want clarity on how they will receive it. Senior people are accustomed to profit distribution or portfolio company success. If they don’t have carried interest, they expect some form of equity distribution.

At the admin and midlevel, such as accounting and finance, employees want to ensure that any bonus they are eligible for is merit-based and clearly defined.

When it comes to family offices competing for talent with hedge funds and venture capital firms, how is that playing out? 

I think they're getting more competitive, the good ones are getting more competitive — and especially the family offices that have come from some kind of success that is not generational, that's been successful because they've been innovative. They understand that they want their teams to be focused on the long-term success as well. 

What are the advantages they have versus those other types of firms?

At a conference yesterday, it came up that emerging funds are having a hard time raising capital. And the larger funds are raising capital because the LPs really trust them, but it's been a much longer time frame to increase the dollars that they put to work; and family offices don't have to go out and do that with multiple LPs. Fundraising is less of a burden because it’s not always top of mind. Usually in the venture firms, you raise one fund, and then you're thinking about the next fund. When you talk about fundraising in the road shows, it's a very time-consuming process, and there's lots of pressure. Family offices don't have the same pressure for the funds. 

I’ve heard from family office executives that it can be hard to move on to other firms outside of that sector. What are you seeing?

I’m not involved in hiring, but our data does show how long it takes to progress from one job to the next job. Are you in a job for two years or three years or four years until you progress to the next title? For good people, it's taking them less time to progress, and they're making more money at each job. That shows that even in a more challenging market, the good people are still extremely valuable.