Family offices are known for their exclusive and personalized approach to managing the wealth of high net-worth families. However, in recent years, there has been a noticeable shift in how these family offices compensate their employees. As the competition for talent intensifies, family offices are reevaluating their compensation plans to attract and retain top-notch professionals. This change is not only driven by the desire to compete with private equity firms and venture funds, but also by the need to align the incentives of the staff with the family’s interests.
According to Patrick McCurry, a partner at McDermott Will & Emery LLP, family offices are facing a “war for talent” as they compete against each other and other financial firms for skilled professionals. To stay ahead in this competitive landscape, family offices are increasingly offering equity stakes and profit-sharing arrangements as part of their compensation packages. These new forms of compensation not only provide employees with greater upside potential but also help in fostering a sense of alignment between the employees and the family’s investment goals.
McCurry highlighted three common ways in which family offices are structuring their compensation plans to include equity and deal participation. A profits interest offers employees a share of the upside in a deal, allowing them to benefit from the profitability of specific investments. This approach not only aligns the incentives of the staff with the success of the investments but also provides tax advantages, as profits are typically taxed at capital gains rates.
Another innovative compensation model being adopted by family offices is co-investments, where employees are given the opportunity to invest alongside the family in specific deals. This approach not only encourages employees to actively participate in the investment process but also helps in reducing the risk associated with the deals. By combining co-investments with profit-sharing arrangements, family offices are able to create a balanced incentive structure that rewards success while also considering potential downsides.
In cases where family offices have complex structures that make it challenging to offer traditional equity or co-investment plans, they can opt for phantom equity. This form of compensation provides employees with notional shares in the performance of specific assets, funds, or companies without actual ownership. While phantom equity offers simplicity in design, it may not be as tax-efficient as other forms of equity participation, as it is usually taxed at ordinary income rates.
Despite the flexibility that family offices have in designing their pay plans, McCurry emphasized the importance of adapting to the changing expectations of employees. In a landscape where equity participation is becoming a standard offering in the financial industry, family offices need to stay competitive by exploring innovative ways to compensate their staff. By embracing new forms of equity and profit-sharing, family offices can not only attract top talent but also create a more aligned and motivated workforce.
The evolving landscape of compensation in family offices reflects a broader trend in the financial industry towards greater transparency, alignment of incentives, and employee engagement. As family offices continue to expand and compete for talent, the adoption of equity participation and profit-sharing arrangements will play a crucial role in shaping their success in the long run. By staying agile and innovative in their approach to compensation, family offices can position themselves as attractive employers in an increasingly competitive market.