Good things take time. This phrase is true in many cases, and the private equity (PE) sector is no exception. Every day, firms invest in the growth of their companies and wait for fund maturity so that they can realize the full potential of the long-term incentives (LTIs) that are attached to performance. This article explores some of the factors that play into LTI awards in PE.
While PE salaries often are competitive with the broader financial services sector, it is the variable element of compensation that can be especially lucrative for employees in key PE functions. Certainly, there is opportunity to earn substantial LTI awards, which usually are in addition to an annual bonus.
WTW's Private Equity Compensation Survey found a clear difference between firms with different ownership types:
Captive firms typically favor traditional LTI plans (eg, stock options, restricted shares, performance plan awards) and usually mirror the scheme operating across the wider organization. Meanwhile, independent firms often offer the following:
As shown in Figure 1, carried interest tends to be the primary incentive in PE firms, with 58% of UK and 59% of US firms operating these plans. Co-investment plans, which tend to be less common in both independent and captive firms, sometimes are offered alongside carried interest plans, according to 22% of UK and 21% of US responding firms that are operating such plans.
Both carried interest and co-investment plans can help create alignment with fund investors, effectively promoting sound investment decisions.
Carried Interest plans:
To determine the best approach for your LTI plans, you need a broad view of the market as well as an intrinsic perspective of your workforce. As with any compensation decision, reliable and up-to-date data is the best foundation for building competitive, defensible pay programs that effectively attract and retain the talent that is critical for business success.