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Article | Beyond Data

Long-term incentive awards in private equity

Build the right LTI plan for your firm

By Lindsey Norton-Bugg and Alexandra Doonan | June 8, 2023

Variable pay can be especially lucrative for private equity employees. We explore the most common approaches and their popularity.
Compensation Strategy & Design|Mergers and Acquisitions|Executive Compensation|Ukupne nagrade
Beyond Data

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.

Impact of firm ownership

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:

  1. Captive firm: A subsidiary of a larger organization that raises most (if not all) of its capital from the parent company
  2. Independent firms: Standalone entities that source their capital from outside investors

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:

  1. Carried interest scheme: A type of compensation offered to PE employees, and specifically for those on the investment team, which sometimes is offered in combination with a co-investment plan. This LTI mechanism is used to allocate and distribute fund gains. Typically, it is based on the entire fund’s performance, allowing for gains and losses to be offset. However, this also can be paid on a deal-by-deal basis.
  2. Co-investment plan: Rarely found apart in conjunction with carried interest schemes, these plans allow (or even require) members of the investment team to put their own money into the fund, aligning the team’s interests with investors' interests.

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.

Additional insights on carried interest and co-investment plans

Carried Interest plans:

  1. Tend to take the form of a true carry plan, structured as a limited partnership
  2. May take the form of a phantom carried interest plan in captive organizations
  3. Traditionally have remained consistent at 20% of net investment returns
  4. In more recent years have had higher or lower levels of carry, often influenced by fund investors

Co-investment plans:

  1. Can represent a considerable capital commitment among individuals
  2. May be offered on a leveraged (ie, with borrowed capital) basis

Choosing the right mechanism for your firm

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.


Associate Director, Rewards Data Intelligence
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Director, Rewards Data Intelligence
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