Distributions of profits to buyout shop executives have begun to tick up after slumping in recent years, said R. Michael Holt, a specialist in private equity compensation trends.
“Carried interest payouts, or distributions, have been nominal at best” in recent years, said Holt, who has tracked pay practices in the industry for more than a decade and conducted his most recent survey undertaken this spring.
Holt is the founder and managing director of Holt Private Equity Consultants in Naples, Fla., which he founded in 2001 after working as a consultant with William M. Mercer, KPMG, and Hay Management Consultants. His latest study, the 2012-2013 Holt-Thomson Reuters Private Equity and Venture Capital Compensation Report, is set to be published this fall in partnership with the publisher of Buyouts.
The study, based on surveys completed by more than 100 firms earlier this year, looks at changes in compensation patterns between 2011 and 2012. “Senior people, the top people, have not been taking pay increases,” Holt said, but the firms have continued to provide annual pay raises to junior staff, as an incentive to keep younger employees from jumping ship. “They’re not financially established yet. [Senior managers] want to make sure they make them reasonably happy.”
Other elements of compensation also have evolved. For instance, employee bonuses used to be entirely discretionary. Today, bonuses, especially for lower-ranking associates and analysts, are tied more toward meeting individual goals rather than the firm’s overall financial performance. Too, buyout shops and venture capital firms have found their compensation approaches converging.
Historically, buyout firms tended to compensate executives using a “Wall Street model,” with relatively modest base salaries and large bonuses based on firm performance, Holt said. Venture capital firms, by contrast, historically paid only salary, with no bonuses, until carried interest began to roll in from exits, which could delay for years employees’ opportunity to collect a big pay day. And because buyout shops charge transaction fees where VCs typically do not, that meant that their employees began to see incentive payments long before their counterparts in early-stage investing.
“Venture firms figured out they had to pay bonuses to compete against LBO firms because they were losing people to the LBO firms,” Holt said. Venture firms still tend to pay more in salary and less in bonuses to junior staffers, but pay levels have come more in line with buyout shops in recent years.
Likewise, management fees have come down over the years, partly because investors have insisted more that GP compensation be based on performance rather than assets under management. “LPs don’t want partners becoming wealthy on management fees because management fees don’t reflect performance,” he said. “If you’re successful, you’ll get larger and keep collecting fees.”
Web site: HoltPrivateEquityCompensation.com