Family Office - Analyst Bonus Structures

So the family office I work for is asking for my input on additional incentives/bonus structure for my role. Currently, I get Base + 10% Bonus. 

I essentially lead the PE/Corp Dev arm for the office, sourcing deals (proprietary & thru intermediaries etc.), Negotiating terms, due diligence, helping structure the agreements, integration etc... I report to the office CEO & CFO. 

We do Low/Middle Market Buyouts. EVs from $5M up to $200M

I thought of a few options, but also really curious to hear your inputs as well!

  1. Fee for qualified deals sourced. Perhaps I get some flat rate for any "qualified" deal I bring to the table
  2. Closing Bonus. For any deals that we close, I get either some % of total value of deal, or a flat fee. 
  3. Some form of equity - This one is tough, we buy & hold our portfolio companies. So any equity in a particular deal, or the broader holding company would likely need to have some vesting period & liquidity option?

What's most important to me is that I feel incentivized for long term alignment at the office. Sure, I could maximize my earnings in the short term by chasing tons of deals... but that doesn't make me feel good. 

I'm curious if you guys have any other alternative structures that might be worth exploring? And for any of these options, how would you go about figuring out a $ value or %?

Thanks!

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Comments (8)

Most Helpful
Sep 24, 2021 - 9:39am

This is a common problem in the family office space. It's not a GP managing external assets, so the typical GP revenue streams (management fees and performance fees) don't exist.

The problem with the first two potential solutions you outlined is the lack of incentive alignment. Your compensation is driven by getting any deal done. There's nothing about getting a good deal done. Either of those two options treats you essentially like a glorified BD person.

I've seen this done two good ways.

One was unique and I thought both generous and wise from the principal. The family created an entity that employed all the staff in the office, then paid in the equivalent of a management fee on all assets (1%). The CIO came from a megafund background, so he had autonomy over hiring and comp for the team. Base and bonus for the ~dozen staff came from that pool, and the guy got to keep any leftovers. Kind of an interesting setup, because you (as the principal) can learn a lot about your CIO by seeing whether he's cheap with staff because he's greedy for himself, or whether he pays well for staff and builds a great team. At this place it was the latter. Everyone had the 2+2 pedigree, strong banking plus strong private equity, and people really seemed to be happy to be there. This obviously wouldn't work as well with a small capital base (this was at least a couple billion in private investments I could identify), but I found it thoughtful.

The second mimicked the vesting schedule you see in some top single managers. Cash bonuses in excess of salary, broken apart on a three-year schedule. I've seen this done as 33-33-33, 25-50-25, 25-35-40, you name it. Your third option matches this most closely.

You can also do some research into phantom equity, it's discussed in several threads on this forum.

There's also share buyback models (a clause that relates to vesting schedules). This could work well because the grant could be drawn up such that the company gets a ROFR on your stock sale ... so you can hold it as long as you like (after it vests), but have a guaranteed liquidity option at fair market value where both you and the company are happy.

Good luck. The family office space is very opaque, but it can be a great place to get awesome and unique exposure to really smart people doing incredibly interesting things off the radar.

I am permanently behind on PMs, it's not personal.

  • 7
Sep 24, 2021 - 10:06am

Hey APAE,

Thanks so much for the response, really helpful and interesting points. Couple follow ups:

I get we're not a GP managing LP's money, however as you've put it, the nature of what I'm doing is very similar in the fact we're targeting individual companies to buy and manage/operate. There is no time horizon so we could hold these portco's into perpetuity, unlike a GP/Fund who wants to return capital back in 7-10 years. But everything else is the same. 

For that, I like the structure you outlined that mimics a GP, where the family office pays their staff the equivalent of a GP management fee. I think the problem here is that we're not a large team. I am the only other person solely focused on the PE/Investment side of things along with the CEO and CFO of the office. So whatever my comp is and incentive structure, it'll be unique from the rest. For all other asset classes (other than our real estate assets), we outsource management to other institutions. 

I feel that my comp is relatively under-market for what I'm doing ($130k Base/Current Bonus), hence the reason for me to suggest more of that BD like cash comp deal incentives to bring potential all in pay more towards market. So there's that aspect, bringing short term comp to market, PLUS thinking of ways for long term incentives, like phantom equity w/ vesting period etc. 

Hope that makes sense?

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Sep 24, 2021 - 10:40am

Your comp is under market, yes.

I would just address the two aspects of comp (cash, and long-term) with these guys in a direct fashion. Note that you're going to be handicapped by a couple factors.

  • Your lifestyle is probably way better than street (are you working 80+ hours?), so asking for a base that matches buy-side analyst (or are you an associate?) figures with the 80-120% bonus to match is quite a reach.
  • You don't mention anything about your background, so it's hard to know whether your resume correlates with the type of candidate that would go through a reputable headhunter to get to a family office job.
  • Your office sounds small. You're targeting $5-200m EV deals, and it sounds like the principal leads it himself as CEO.

Add those up and it's unlikely you're going to get top of street or even street comp, frankly.

When I say talk about it directly, I mean initiating an earnest conversation where you talk about how you are invested in a long-term role there, want to further your own skills and development, and would like to see a structure where you're rewarded for doing that there with and for them.

That could include talking about their ideas for titular progression (how many years before you're an associate; as an associate, can you become a vice president; do they think about such progression purely in terms of time, or are there intangible milestones involved), team expansion (do they plan to have you as the only junior resource forever; do they envision you eventually stepping into more responsibility and adding a junior resource beneath you; do they envision adding a new hire every two years), and the strategy of the office (does your target EV range ever change; do new asset classes come into the mix).

Do some visualization and roleplaying. Plan the conversation out in your head to prepare for any of the identifiable ways it can go.

It may seem daunting, but (good) people are always happy to see someone take initiative, and just about anyone appreciates the opportunity to offload workstreams or responsibility to someone capable. The more you are able to demonstrate in this type of conversation that that's who you are, the better your likelihood of convincing them to adopt the positions you think are most appropriate (on title, team expansion, etc.). 

I am permanently behind on PMs, it's not personal.

  • 6
Sep 24, 2021 - 12:41pm

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