Family offices are facing a growing battle for talent, leading to the need for more competitive compensation packages. As these offices grow in size and number, they are finding themselves in direct competition with private equity firms and venture funds for top staff members. To attract and retain the best employees, family offices are enhancing their compensation plans by offering not only salaries and bonuses but also equity stakes and profit-sharing opportunities.
The Importance of Incentives
Patrick McCurry, a partner at McDermott Will & Emery LLP in Chicago who works closely with single-family offices, emphasizes the need for family offices to adapt to the changing landscape of hiring. According to McCurry, there is a “war for talent” as family offices compete with each other and traditional financial institutions for skilled professionals. By offering equity stakes and profit-sharing arrangements, family offices can provide employees with greater upside and incentives to perform at their best.
In an article featured in the UBS Family Office Quarterly, McCurry outlines three common ways that family offices are compensating their staff through equity and profit-sharing plans. The first method involves offering employees a profits interest, which allows them to receive a share of profits generated from successful deals. This incentivizes employees to contribute to the growth and success of the family office while also providing tax benefits, as profits are typically treated as capital gains.
Another popular method of compensation is through co-investments, where employees have the opportunity to invest their own money alongside the family office in specific deals. This not only aligns the interests of the employees with the family but also encourages them to make less risky investment decisions. By combining co-investments with profit-sharing arrangements, family offices can provide both upside potential and downside risk to their staff members.
Phantom Equity for Simplicity
For family offices with complex structures that make it challenging to issue profit shares or co-investments, phantom equity can be a viable alternative. Phantom equity grants employees notional shares of assets or funds without actual ownership, similar to a deferred tax-free 401(k) plan. However, phantom equity is eventually taxed at ordinary income rates, making it less appealing to employees. Despite its drawbacks, phantom equity is sometimes used for its simplicity in cases where traditional equity options are not feasible.
Flexibility in Compensation Design
Family offices have the advantage of flexibility in designing pay plans due to their focus on serving a single family. However, in order to remain competitive in the talent market, family offices must evolve their compensation strategies to include various forms of equity. McCurry highlights the importance of staying ahead of the curve, stating that as more family offices adopt equity and profit-sharing plans, employees come to expect these incentives as part of their compensation packages.
The trend towards offering equity stakes and profit-sharing arrangements reflects the evolving nature of family offices and their efforts to attract and retain top talent in a competitive hiring landscape. By providing employees with a stake in the success of the family office, these compensation plans create alignment of interests and drive performance towards achieving long-term growth and sustainability.