As the family office industry continues to mature and formalise, the discussion around staffing has become even more vital. As one of the consistent costs in a family office, compensation is a nuanced and multifaceted subject – made even more complex by the lack of industry benchmarking. The dynamics of single and multi-family offices, the nature of underlying investments, and the role of investors all add to the complexity of designing appropriate and effective compensation packages for family office staff. Here, we explore the various aspects of family office compensation, breaking it down into four key sections.
Understanding the Role of Investors and Market Dynamics in family office compensation
In the ever-evolving world of family offices, understanding the interplay of investors and market dynamics is the first step to designing effective compensation structures.
Investor Involvement
The level of investor involvement can greatly influence compensation structures. Active participation in the selection and diligence of investments, or a collaborative approach with outside managers or the family, will significantly impact how control and risk are approached, and thus affect compensation.
Market Performance
Market fluctuations, particularly in private markets, can further complicate compensation models. The recent underperformance of private markets, for instance, has challenged traditional compensation models, leading some to seek new approaches.
Ranges and Approaches in Compensation
Compensation for family office staff can vary widely, from as low as $500,000 to as high as $7 or $8 million. These amounts may be influenced by factors such as the size of the assets under control, the type of family office (single or multi-family), and the nature of the investments.
Tailoring Compensation Structures
As most family offices will know, there is no one-size-fits-all approach to many operations, and there are various ways they tailor compensation structures.
The Shift to Salary
There’s a growing trend towards prioritising a higher salary base over incentive-driven models. By not solely incentivising risk-taking behaviour for returns, this approach promotes stability and aligns the family office staff’s interest with that of the family. Bonuses may still exist, but they might be more directly aligned with the family’s return or offer the staff an equity stake in the investments.
Equity Participation
Recently more family offices have been implementing equity participation schemes or discretionary bonuses tied to a variety of factors. By doing so, they create alignment with the staff and the family’s interests while retaining the ability to fairly compensate employees even in challenging market conditions.
Discretionary Bonuses
Family offices are increasingly employing flexible bonus structures that consider not only quantitative factors but also qualitative measures like collaboration and operational performance. This allows families to maintain control over compensation and adjust it based on circumstances and subjective evaluation.
The Challenge of Benchmarking
Benchmarking is a challenge for family offices, across a number of topics and datasets, but when it comes to figuring out what to pay key staff, benchmarking is a double-edged sword.
Lack of Clear Benchmarks
One of the biggest challenges in navigating family office compensation is the lack of clear benchmarks, particularly in the single family office space. This often necessitates a highly personalised approach that considers factors such as the individual’s background, experience and previous compensation.
The Perils of Over-Reliance on Benchmarks
In some cases, benchmarks can be more problematic than helpful. The wide variation in family office structures, investment strategies, and geographies makes comparisons difficult. Family offices are unique by nature, and so is the industry itself. Relying on benchmarks might lead to unnecessary pressure or confusion.
It’s clear that the discussion surrounding compensation in the family office landscape is complex and requires careful consideration of various factors. Understanding the dynamics between investors, market performance, and individual needs is vital in building compensation models that balance fairness, motivation, alignment of interests, and stability.
In an industry where standard benchmarks often fall short, creating a tailored compensation approach, one that takes into account the long-term nature of family office relationships, can pave the way to success. It’s a delicate balance, requiring an understanding of not just numbers but the very essence of family office structures, investment philosophies, and long-term strategies. The family office space is like an extended family, and treating compensation as a 10-year partnership rather than a yearly evaluation can foster a rewarding and enduring relationship.