In the world of family offices, there is a noticeable shift towards offering more enticing compensation packages to employees. Unlike the traditional setup of salaries and bonuses, family offices are now providing equity stakes and profit-sharing opportunities to attract and retain top talent. This change in approach is driven by the intensifying competition among family offices, private equity firms, hedge funds, and venture capital firms for skilled professionals.
Patrick McCurry, a partner at McDermott Will & Emery LLP, highlighted the importance of adapting to this evolving hiring landscape. According to McCurry, the increasing demand for talent has led to a “war for talent” in the family office industry. As a result, family offices are revamping their compensation plans to align with the changing expectations of employees and to remain competitive in the market.
One of the key strategies adopted by family offices is profit-sharing arrangements with employees. By offering profits interests, employees are incentivized to contribute to the success of the family office. This model allows employees to earn a share of the profits generated from strategic deals or investments. The performance-based nature of profits interests ensures that employees only receive payouts when the family office sees growth in its investments.
Moreover, profits interests offer tax advantages to employees, as the profits are categorized as capital gains rather than ordinary income. This results in a lower tax liability for employees, making the compensation package more attractive. Additionally, profits interests are structured to align the interests of employees with those of the family office, creating a sense of unity and shared goals among the team.
Another approach taken by family offices is co-investment opportunities for employees. Through co-investments, employees have the chance to invest their own money in specific deals alongside the family office. This not only fosters a sense of ownership and responsibility among employees but also encourages them to make informed and strategic investment decisions.
Family offices often combine co-investments with profit-sharing arrangements to provide employees with both upside potential and downside risk. By involving employees in the investment process, family offices can leverage their expertise and commitment to drive better outcomes for the organization. Co-investments also help in diversifying the portfolio and minimizing risk in investment decisions.
For family offices with complex structures that make it challenging to offer profit-sharing or co-investment opportunities, phantom equity can be a viable alternative. Phantom equity represents notional shares of assets or funds that track performance without actual ownership. While this option provides simplicity in compensation planning, it may not be as tax-efficient or appealing to employees as traditional equity stakes.
Although family offices have the flexibility to design customized pay plans tailored to their specific needs, McCurry emphasized the importance of adopting various forms of equity to attract top talent. In a rapidly evolving market, family offices need to keep pace with industry trends and offer competitive compensation packages to remain an employer of choice for skilled professionals. The growing acceptance of equity-based compensation in family offices reflects a broader trend towards aligning employee interests with organizational success.
Optimizing compensation plans in family offices is essential for attracting, retaining, and motivating talented professionals. By incorporating equity stakes, profit-sharing arrangements, and co-investment opportunities, family offices can create a compelling value proposition for employees. The evolving landscape of compensation in family offices underscores the need for innovation and adaptability in designing competitive pay structures that drive organizational performance and employee engagement.