Employment letter does not specify value for target bonus, and does not specify carry allocation (carry offered verbally, not in letter)? Either of these normal?

I got an offer with base, bonus, and carry allocation. 

  • Base is listed, no issue there
  • Bonus is "discretionary" and they did not mention target bonus either verbally or in offer letter
  • Carry award was mentioned verbally (specific % allocation) but they mentioned it is not written in offer letter)

Are #2 or #3 normal? I was hoping this would be a step up from current comp (no carry) but actually might end up being lower! 

Thank you for insights!

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Comments (14)

  • Analyst 2 in IB-M&A
Apr 8, 2021 - 12:18pm

Alright well my post isn't showing up on the index, not sure if I'm just being impatient but just in case since I have an acceptance deadline I'll tag one of the forum greats CompBanker 

Apr 8, 2021 - 12:48pm

Carry may or may not be specified in the offer letter (I've personally seen both methods). In the circumstance where the carry wasn't in the offer letter, it was provided in a side-letter or even in the body of the email.

In terms of the bonus, you absolutely should clarify what the target bonus is (generally as a % of base), the historical track record of bonus payouts, and if there are any specific objectives that need to be hit (aka you must do X platform investments, deploy Y capital, or whatever). Usually the target % is in the offer letter and it will be subject to the discretion of the partners based on both individual and firm performance.

CompBanker

  • Analyst 2 in IB-M&A
Apr 8, 2021 - 1:06pm

Thank you. Very helpful. Understood on the bonus point.

Is there risk associated with not having carry in the offer letter / what would you do here? Should I be pushing to have it written down? Why would someone but unwilling to put this in the main offer letter / only in an email or side letter if they really did intend on awarding the carry?

As a side question, how would you go about negotiating a carry allocation? I would not accept unless awarded double the carry. Not sure if I should play coy and ask for 3x and compromise for 2x, or just be honest and say look, I'm out unless you double the carry.

Apr 8, 2021 - 3:04pm

The carry allocation in the offer letter is kind of meaningless as the carry is granted through separate legal documentation anyways. However, the firm may still not want to put the carry allocation in an offer letter if the fund has not yet been raised (because technically the fund doesn't exist it so they are promising you value in a non-existent vehicle). This isn't problematic I don't think, but it can just be cleaner to keep it separate. I would honestly be happy with separate letter.

In terms of the negotiation, so many factors go into it... hard to really say. If you really wouldn't accept for anything less than 2x the current allocation, you may be better off just saying that rather than asking for 3x and really putting them off.

CompBanker

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  • Associate 1 in PE - LBOs
Apr 8, 2021 - 2:02pm

My carry award allocation wasn't specifically written out in my offer letter. I got the legal docs for my carry a few months after I started, so there was an element of trust there. Definitely try to put the target bonus % in writing in the offer letter though.

Apr 8, 2021 - 2:06pm

Rule of thumb in finance in order to not get screwed over: have your comp (base + bonus) clearly written out on paper, and if not, get it clarified by your boss/HR ASAP 

  • Analyst 2 in IB-M&A
Apr 8, 2021 - 2:27pm

Thanks, all. This is helpful. For calculating the annual impact of carry, should I assume a 5y fund life? E.g., fund of $100, assuming 2x exit, $100 of carry DAW * 20% for the GP = $20mm at fund level, / 5 years = $4 / year in carry

  • Associate 1 in PE - LBOs
Apr 8, 2021 - 2:32pm

I think it's totally normal if you have a call with the firm to fully understand the carry economics and ask all the relevant questions - fund life, European or American distribution waterfall, vesting schedule, any potential vesting cliff, etc. Better to know all the details instead of making assumptions.

Apr 8, 2021 - 3:00pm

The methodology you described is how I like to do it. The 5 year figure is supposed to represent how much time passes in between funds. However, there isn't a "right" way.

CompBanker

  • Analyst 2 in IB-M&A
Apr 8, 2021 - 4:41pm

Contrary to my last post I do have one more question. I think it is likely that the firm does not budge on carry allocation (why would they). So, if not, I will ask for co-invest. A couple of questions:

  • What are the general considerations to be aware of when coinvesting?
  • Do I ask for deal-by-deal coinvest?
  • Do I ask to invest in the GP on a fee-free basis?
  • Broadly, how does levered coinvest work (I would like to ask for levered coinvest). Who provides the loan?

Thank you again.

Apr 9, 2021 - 6:24am

The fees on co-invest and the ability to cherry pick will be defined in the LPA, so it's not really something you can negotiate, so rather it is understanding what has been agreed between the fund and its LPs.

You should be check to make sure you can retain your investment if you do leave. That is, it can't be bought back at cost.

Leverage on co-invest varies based on how a PE firm wants to incentivize its staff.

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