A majority of family offices — 54% — offer long-term incentives as part of employees’ compensation packages, according to the recently released Compensation Practices of Investment-Focused Family Offices, from Morgan Stanley Private Wealth Management and Botoff Consulting.
The figure was higher for investment-focused family offices, 62% of which offer long-term incentives.
“That makes sense, because long-term incentive plans are typically a compensation structure that you see associated with investment firms — so if we’re thinking about the talent that an investment-focused family office would employ, it would be very similar to the talent pool that an investment firm would employ,” says Valerie Wong Fountain, head of Family Office Resources Platform and Partner Management at Morgan Stanley. “A lot of the research and thought that goes into long-term incentive compensation plans is focused on ensuring that the outcomes that the family office is driving toward are aligned with those of the family.”
In family offices that use long-term incentive plans, almost all (95%) offer them to executives. Smaller percentages offer them to management (46%) and staff (21%). Investment-focused firms offered long-term incentives to executives at about the same rate as family offices overall, but they were more likely to offer them to management (52%) and staff (38%).
“Executives are the key decision makers in the family office, so if you’re trying to align the family office employees with the organization’s strategy and goals, it makes sense that you would see this prevalence of long-term incentive plans at the executive level,” Fountain says.
The report looked at five types of long-term incentives: co-investment opportunities, deferred incentive compensation, carried interest/phantom carry, profit sharing and operating company equity/phantom equity.
The report found that overall, the most prevalent forms of long-term incentive were co-investment opportunities (57%) and deferred incentive compensation (56%). For investment-focused family offices, co-investment opportunities were the most common (61%) followed by carried interest (59%) and deferred incentive compensation (43%).
“For the first time in about a decade, co-investment opportunities have slightly surpassed deferred incentive compensation as the most prevalent plan,” Fountain says. “That seems to be consistent with the broader trends that we see in the family office industry: As we see the rise of private investments, it makes sense that co-investment opportunities as a type of compensation would rise as well.”
For more on the report, read the press release or commentary in Forbes: Why Family Offices Are Going Beyond The Bonus And Rewriting The Rules Of Reward.