Family offices are facing increased competition for top talent and are therefore adjusting their compensation plans to attract and retain employees. In addition to salaries and bonuses, family offices are now offering equity stakes and profit-sharing opportunities to provide employees with more incentives and upside potential. Patrick McCurry, a partner at McDermott Will & Emery LLP, notes that this shift is necessary as family offices compete not only with each other but also with private equity firms, hedge funds, and venture capital firms for talent. By offering equity and profit-sharing, family offices can align the incentives of their staff with the goals of the family.
According to an article in the UBS Family Office Quarterly, there are three common ways that single-family offices are compensating employees with deal and equity plans. The first method is through profits interest, which gives employees a share of the upside in a deal or a group of deals. This means that employees only participate in the profits if there is growth. This arrangement also provides tax benefits, as the employee typically pays the long-term capital gains rate instead of the ordinary income rate.
The second method is co-investment, where employees have the opportunity to invest their own money in a deal alongside the family office. This encourages employees to make less risky deals, as they have a personal stake in the investment. Co-investments are often paired with profit-sharing to provide both upside and potential downside to staff.
The third method is phantom equity, which is offered when a family office is too complex to issue profit shares or co-investments. Phantom equity represents notional shares of a basket of assets or funds that track performance without actual ownership. While this option offers simplicity, it may be less attractive to employees as it is typically taxed at ordinary income rates.
Although family offices have more flexibility in designing pay plans due to their single-family structure, offering various forms of equity is becoming increasingly important to compete for talent. According to McCurry, as more family offices start offering equity and profit-sharing, employees come to expect it. Therefore, it is crucial for family offices to adapt and not be the outlier in this trend.
In conclusion, family offices are recognizing the need to adjust their compensation plans to attract and retain top talent. By offering equity stakes and profit-sharing opportunities, they can align the incentives of their staff with the family’s goals. This shift is necessary to compete with other financial firms and meet the expectations of employees in the industry.
