Private Equity Pay Scales Continue Leveling Off

Venture capitalists, like almost everyone else, are curious to know how well their competitors are getting paid, but they often keep mum about their own incomes.

“I would say it’s probably akin to locker room discussion about sex,” says Christopher Gabrieli, general partner at Bessemer Venture Partners. No one wants to make claims so outrageous that they are obviously false, but at the same time, no one wants to sound less successful than the next guy.

Junior members of the venture capital community are benefiting from an ongoing trend of higher pay for those in the lower rungs. And for a second consecutive year, more senior members are losing ground, according to William M. Mercer Inc. Performance & Rewards Consulting, which at press time was nearing the release of its annual compensation survey of private equity firms, which gives VCs a benchmark to gauge their pay. About 65 firms, mostly venture firms and some buyout groups, took part in the survey.

These junior partners saw their average total pay increase by 26% and associates got a 19% hike this year from 1998, according to Mercer’s “1999 Compensation Survey Conducted for Venture Capital and Other Private Equity Firms.” Mid-level partners also benefited, with 14% pay increases, as did analysts, whose average pay rose 24%.

But the big winners remain senior associates, whose incomes – salary plus bonus plus carry and other “long term incentives” – shot up an average of 52% in 1999 from the year before, said Mercer Principal Michael Holt.

This year’s decline in income for the two highest VC posts chips away at 1997’s extraordinary gains, but the losses still leave top-level VCs well above the poverty line.

The median income, including bonus and carry, for a managing general director is $1.167 million this year, while the median salary for a senior partner is $1.084 million.

Despite the recent gains, salaries drop considerably from there, with mid-level partners earning $402,000 in 1999 and junior partners earning $220,000, according to Mercer. The median total income for senior associates is $146,000, while the median associate’s pay is $91,000, and an analyst’s take is $68,000.

Mercer found that 9% of associates are eligible to receive some cut of their firms’ carried interest split this year, as are 36% of senior associates. More than half – 57% – of junior partners are eligible to share in their firms’ carry, and even 24% of administrative managers are eligible to share in their firms’ profits.

Junior investment professionals are the beneficiaries of a tight labor market, especially in the venture arena, where firms must compete with each other and with high-technology companies for young talent. And with the increasing size of venture funds – a total of $24.34 billion was raised in 1998 – venture firms need more people to manage their investment vehicles, thus adding fuel to the recruitment fire.

Of course, bigger funds mean more carry dollars to spread around at successful firms. Additionally, with carries going up to 25% – and in some cases even 30% – and management fees holding steady between 2% and 2.5%, there is enough money to pay attractive salaries and to offer small pieces of carry to less experienced investment professionals without penalizing senior VCs.

Battery Ventures Founding General Partner Bob Barrett expects the trend to continue. His firm gives carry to its administrative assistants and lets associates, senior associates and principals participate in the firm’s incentive program. Essentially, they get to participate in the profits on a deal-by-deal basis as a reward for originating or working on deals.

Technology Crossover Ventures (TCV), too, spreads profits around, assigning pieces of carry to all investment professionals and office assistants. TCV tries to keep its staff happy to stave off offers from competing firms trying to poach TCV’s staff, said General Partner Jay Hoag.

Spreading the Wealth

Even before a bonus or carry is added, venture capitalists’ salaries are well above the national norm. The median salary for an analyst – the lowest member of the venture capital food chain – is $49,000 this year. By comparison, the average per capita income in the United States was $20,120 last year, according to U.S. Census Bureau data released in late September. That means the median managing general partner’s salary, not including bonus and carry is $312,000 this year, or 15-and-one-half times last year’s average American income. A median junior partner’s salary in 1999 is $100,000, according to Mercer, almost five times this nation’s average income in 1998.

Nevertheless, venture capitalists often assert they aren’t in it for the money. But would they keep their jobs if their incomes were $20,120 or even $40,000?

TCV’s Hoag said he would work in venture capital for less money, although he found the $20,000 question unanswerable.

Investors always wonder about the motivation of venture capitalists who already have amassed personal fortunes, but Pantheon Ventures’ managing director Jay Pierrepont sees a lot of very wealthy VCs who remain extremely motivated “even with a fleet of Ferraris in their garage.”

Of course, he is thankful for the VCs’ success, which contributes directly the success of his own organization’s fund-of-funds. Top venture capitalists have been at the forefront of technological revolutions built around the personal computer, software and Internet, and they’ve generated enormous wealth both for the limited partners and for themselves, he says.

Carrying that idea further, Bessemer’s Gabrieli points out that venture capital is not a zero sum game. “It’s the best face of capitalism, the willingness of the private sector to take risk … no one else is willing to take in pursuit of innovation.”

VCs’ total salaries should not be compared to – or lumped in with – the pay of chief executives, he says.

“There’s no question that when you look at venture capital, it puts the kind of fact of capitalism squarely in your face,” Gabrieli says. “And remember: what CEOs make is not a function of capitalism … it’s very different. What we make is a function of capital. We put money into companies, and we share in the return on that money.”