Traditionally, salary and compensation structures, along with most other operational aspects of the family office, have remained opaque despite the growing global demand for experienced executives to manage various financial, investment, legal and service offerings within these organizations.
This led to limited growth in the understanding and application of reward and retention strategies, often resulting in the over- or under-valuation of executives as these professionals and the families who employed them struggled to assign appropriate pricing.
Such challenges can create discord and resentment on the part of one or both parties, ultimately leading to staff churn – an expensive exercise in any organization but potentially more so for the family office.
Such matters highlight the importance of dedicating the necessary time and resources to developing competitive compensation, reward and retention strategies. This is a worthy investment that encourages success and assists in securing the future of the family office.
When seeking to attract, retain and motivate seasoned family office executives, understanding current trends and benchmarks and developing processes and structures around these are key to success.
Developing a reward and retention process
Effective compensation, reward and retention strategies ultimately facilitate a balance between the family and executives concerned. They address the needs of both parties and achieving their desired outcomes.
These strategies need to be effected by implementing a process based on the family’s values and expected outcomes that also consider the executives’ passion and interests to achieve a balanced objective.
While this can be a delicate undertaking, it is highly beneficial. It enables both the family and their top executives to align their values, understand the motivation behind strategic decisions, collaborate on how these will be achieved, and clearly define each party’s expectations. It also enables the formulation of clear performance objectives and remuneration strategies for meeting and exceeding these to be set, monitored, measured, and re-evaluated in time. The more detailed these discussions and prescriptions that result from them are, the greater the clarity and less likely it will be for issues to arise.
Financial compensation in the form of salaries and bonuses is the basis of most reward and retention structures; however, it is also essential for families to consider other ways in which executives may be rewarded and retained.
Long-term incentive plans are thus becoming a definite trend. Depending on the executive, families can use their networks and connections to offer the individual opportunities they may otherwise not be afforded. These may be personally, philanthropically, hedonistically or investment-related.
When tailoring reward and retention strategies, it is vital to balance the family’s values, expectations and objectives, and employee needs and motivations. Doing so helps to ensure that neither party feels aggrieved by the arrangement. Honest, open communication is, therefore, critical in such regards.
Guidelines for implementing reward and retention structures
Once a reward and retention strategy has been developed, the structures and tools to implement and measure it and family office best practices should be considered. Due to their capacity for flexibility, family offices can excel in this regard. Below are some of the reward and retention structures that family offices have at their disposal, as well as the currently observed trends within these.
A shift towards consistency in family office salaries has taken place over the last decade. However, according to the Agreus Global Family Office Compensation Benchmark Report, a wide variance still exists, making benchmarking more complex.
Salaries may vary depending on the complexity of the family’s wealth and the role, culture and purpose of the family office. Still, the total value of assets under management (AUM) and Geographical location play the most prominent roles in determining salary scales.
Executives’ base salaries generally reflect two key factors: comparable amounts paid by family offices in the same region and the executive’s salary history.
Discretionary & objectives-based bonuses
According to the Global Family Office Compensation Benchmark report, discretionary bonuses are the most common reward practice amongst Family Offices worldwide. The report shows that the majority pay a discretionary bonus of between 21% – 30% of basic salaries across all staff roles. On average, Asia Pacific pays the highest at 31% – 50% of the basic salary as a bonus.
Objectives-based bonuses may also be considered. However, disagreements on bonus payments are reportedly the primary cause of disputes in family offices. Best practices dictate that total compensation structures be clarified from the outset and clear, measurable key performance areas be implemented to monitor these.
Formulaic bonuses and long-term incentive plans (LTIP)
Executives in leadership and investment roles who have established a track record of trust and success within these, formulaic bonuses and long-term incentive plans are a growing trend. This is especially evident within mature markets like the USA, UK and Europe.
These structures are generally implemented after the first year of service. They may consist of deferred cash or dividends that vest over a defined period, typically three to five years, serving as motivational, retention and reward tools.
Carried interest is a popular reward structure in the fund management arena wherein executives receive a specific percentage of net gain in investment returns in portfolios above a hurdle rate or cost of capital. This may be applied to an entire portfolio or specific investments.
Such incentives are usually offered to the CIO and CEO in family offices, where current assets under management exceed $500 million. In some organizations, however, other team members may also be rewarded under such agreements. Percentages of carry vary from 1-2% to 10-20% depending on the size of the family office.
An incentive method growing in popularity is rewarding key executives with shares or ownership opportunities in selected family ventures and investments. Within these structures, individual executives are typically required to commit 1-2% of the investment amount or up to $200,000 each year, based on their net worth.
For family office reward and retention strategies to be effective, they must be carefully considered and executed both during family office talent selection and beyond. Communication, analysis and value alignment, as well as a balance between the organization and executives’ objectives and expectations, are vital, as are measurement and re-evaluation from time to time to ensure continued success and key retention.
Author: Francois Botha
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