Family offices are facing a growing battle for talent as they expand in size and number, competing directly with private equity firms and venture funds for experienced staff. To address this challenge, family offices are enhancing their compensation packages beyond traditional salaries and bonuses by offering equity stakes and profit-sharing opportunities to attract and retain top talent. According to Patrick McCurry, a partner at McDermott Will & Emery LLP, single-family offices must adapt to the increasingly competitive hiring landscape in order to secure the best employees.
Aligning Incentives
McCurry highlights the importance of aligning the incentives of staff with the goals of the family office. By offering equity stakes and profit-sharing arrangements, family offices can ensure that employees have a vested interest in the success of the organization. This approach not only motivates employees to work towards common objectives but also fosters a sense of teamwork and collaboration within the organization.
In a recent UBS Family Office Quarterly article, McCurry outlined three common ways in which family offices are structuring compensation plans to include equity and deal participation. The first method involves providing employees with a profits interest, which entitles them to a share of the profits generated from specific deals or a portfolio of investments. This approach incentivizes employees to contribute towards the growth and profitability of the family office while also offering tax benefits in the form of capital gains tax rates.
Another popular compensation structure is co-investment, where employees have the opportunity to invest their own capital alongside the family office in specific deals. This not only aligns the interests of employees with the success of the investments but also encourages them to make well-informed and less risky decisions. Co-investments are often paired with profit-sharing arrangements to provide employees with both upside potential and downside risk.
For family offices with complex structures that make it challenging to issue traditional equity or co-investment opportunities, phantom equity offers a viable alternative. Phantom equity provides employees with notional shares in a basket of assets or funds, allowing them to track performance without actual ownership. While phantom equity may offer tax advantages initially, it is usually taxed at ordinary income rates in the long run, making it less appealing to employees.
Due to their unique nature and focus on serving a single family, family offices have the flexibility to design customized pay plans that suit their specific needs. However, McCurry emphasizes the importance of staying competitive in the talent market by offering a variety of equity-based incentives. As more family offices adopt equity-sharing models, employees have come to expect these benefits as part of their compensation packages.
Family offices are increasingly recognizing the importance of offering equity stakes and profit-sharing opportunities to attract and retain top talent in a competitive hiring landscape. By aligning the incentives of employees with the goals of the organization, family offices can create a collaborative and success-driven work environment that benefits both parties. As the trend towards equity-based compensation continues to gain momentum, family offices will need to adapt and evolve their pay structures to remain competitive and attract the best talent in the industry.
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