How do family offices deal with carried interest/bonuses

There's no set formula. You know some of the common problems with the family office space: things are opaque in general, and no two offices are alike. They show up for this topic too.

There are a couple common methods, and you'll also encounter a lot of one-offs.

One:

One is a market-based cash bonus model. This is usually done in offices that have an investment head experienced in the private equity industry such that s/he knows market comp well enough (or is cozy enough with headhunters to ask) to stroke checks for people commensurate to what they'd get on the open market. As you can imagine, a guy who was formerly senior at KKR or somewhere probably runs a family office in a way that attracts junior talent from that kind of background: there's a structured investment process, family members aren't involved in the day-to-day so there's no touchy politics creating a lightning rod, comp model is clearly articulated.

This tends not to be done at places run by someone who's got experience more like an allocator, and where the strategy consequently is biased more toward primary fund commitments than direct investing.

Two:

Another is a phantom equity model. I haven't seen this too frequently, but in it, staff get a notional mark and are paid pro rata based on the assets' performance. This would make sense in a buy-and-hold strategy, for instance, where there might be a cash flow-producing business that the office extracts dividends from annually.

There's obviously no carry pool, and it doesn't make sense to give investment staff any ownership in the business/es, but that doesn't mean there can't be a basis point calculation to include them in the cash flows. This model can also work for direct loans or other credit strategies that generate yield that isn't correlated to exiting a business.

Three:

The last common one is actually a traditional carry pool. Here a family will set up a GP entity that they own, hire a CIO in and give him an economic interest (that may or may not be divergent from his ownership interest in the entity), and allow him to allocate non-ownership but economic interests to the staff members he chooses to hire.

Put more plainly, a family will own the GP completely, create whatever performance fee economics they're comfortable with giving away, then hire a CIO and grant him 100% decision-making control over how those economics are divided between him and his team, even though he and they own zero of the GP entity itself.

Illustratively, the family may allow a 0.5%-and-10% fee layer. They control 100% of the interests in the GP, but create operating documents that say that the 10% goes to the CIO employee. As the CIO hires staff, s/he allocates a portion of that total 10% carry pool to the staff as they join.

This is most common in a later-generation family office setting where there's a more complicated entity web: multiple generations of family members, a variety of charitable entities, different trusts for various descendants, etc. The ownership of the family's entire portfolio is divided between all of the entities, each of whom pay that fee layer to the GP entity. It obviously is not a perfect fit in the context of true long-term investing (for the glaring reason you mentioned), but you'll see it sometimes in families that are really big.

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This may not answer your question directly, but without more input on the asset selection, team composition, and parameters the principal is willing to tolerate, this is the best I can give you.

I've raised a non-trivial amount of capital exclusively from families, became friends with a number of the principals, and have found myself in a pocket of people who discuss this sort of stuff regularly.