In building out our understanding of common family office pain points (yes, even though many family offices like to be seen in a league of their own, there are clear commonalities at specific stages in their formation and evolution), finding and retaining top talent has repeatedly come up as one family offices face at almost every stage.
And one aspect in particular continually piques the interest of industry insiders: compensation. It’s not merely a topic of conversation, but a labyrinth of complexities influenced by multiple vectors, from investor involvement to market performance. It’s a matter not just of figures, but also of philosophies.
Navigating Investor Dynamics and Market Conditions
The very foundation of any successful compensation structure in a family office is rooted in understanding investor dynamics. The degree of investor involvement has a direct impact on how a compensation model should be architected. For instance, if the investors are actively involved in selection and due diligence processes, then a compensation structure might involve a heavier component of variable pay based on performance.
Market performance further adds to the complexity. In today’s challenging environment, especially with the underperformance of some private markets, conventional wisdom is put to the test. This can lead to innovative compensation models that perhaps prioritize downside protection and long-term sustainability over short-term gains.
The Art of Personalization in Compensation
With figures ranging from $500,000 to a staggering $7 million or more, compensation in this space lacks a universal scale. These discrepancies aren’t merely a function of AUM size or the type of family office; they’re a manifestation of a deeply personalized approach. This is where things like the Shift to Salary become more relevant. The industry has been witnessing a drift towards higher base salaries and away from predominantly incentive-driven models, encouraging stability and aligning staff interests with those of the family.
The Diversification of Incentives
Equity participation and discretionary bonuses are increasingly common. The former aligns the interest of the family and staff, even in fluctuating market conditions, while the latter allows for a more nuanced evaluation based on qualitative factors such as teamwork and operational excellence.
A big consideration that could further complicate discussions is that investment horizons, goals and risk appetite could be very different for an employee in a family office compared to a family with a long-term investment outlook.
Benchmarking: A Necessary but Limited Tool
We operate in an industry that lacks clear benchmarks, which could be considered both a challenge and an opportunity. The recent release of the KPMG Global Family Office Compensation Benchmark Report adds a layer of transparency to this opaque topic. However, the importance of not over-relying on such benchmarks cannot be overstated. Comparing the incomparable leads to unnecessary stress and even misaligned structures.
Starting with a clean slate can sometimes be a pragmatic approach in an environment that is inherently customized and subjective. It offers the flexibility to take into account multiple variables such as family ethos, individual staff skills, types of investments, and the unique challenges and opportunities that come with them
While market-related data is essential, it’s not the panacea for all compensation-related dilemmas. Issues like value alignment, long-term incentives, and experience versus value must be considered. The family office space indeed mimics an extended family, and compensation should reflect that familial essence over a 10-year horizon, rather than a narrow yearly focus.
Rewarding the role’s worth over market trends can result in unparalleled alignment and long-term commitment from the staff. Moreover, flexibility in work conditions, perks, and non-financial incentives are tools that can not only incentivize but inspire.
The Holistic Approach to Family Office Compensation
Compensation within the family office environment is more than just a series of financial transactions; it’s a narrative that underscores the identity, values, and long-term objectives of the family and its “second family” of employees. It’s about fostering a mutually beneficial relationship that transcends the here and now, deeply rooted in shared values and a commitment to holistic success.
This topic is more pertinent now than ever. As the family office sector sees rapid growth and increasing professionalization, the demand for top-tier talent surges. If approached thoughtfully, the challenges of today can serve as catalysts for more evolved, effective family office models that thrive on alignment and shared purpose, rather than mere financial incentives.
As family office advisor, Jason Pinkham aptly puts it, “The family office space is like an extended family, and treating compensation as a 10-year partnership rather than a yearly evaluation can foster a rewarding and enduring relationship.”
This is the essence of modern family office compensation: a finely balanced cocktail of financial and emotional investment, for a future that values both.
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