In the world of family offices, a new trend is emerging – the offering of lucrative shares of equity and deal profits to employees. This shift comes as family offices find themselves in a fierce competition for top talent with private equity firms and venture funds. As the landscape evolves, family offices are adapting their compensation plans to include more than just salaries and bonuses, now incorporating equity stakes and profit-sharing opportunities.
According to Patrick McCurry, a partner at McDermott Will & Emery LLP, the increasing size and number of family offices have led to a more competitive hiring landscape. Family offices are not only competing against each other for talent but also against established players in the financial industry such as private equity, hedge funds, and venture capital firms. In order to attract and retain top employees, family offices are reevaluating their compensation packages to offer more incentives and upside potential.
One of the key reasons family offices are turning to equity and profit-sharing plans is to align the incentives of their employees with that of the family’s objectives. By granting staff a share of the profits and upside in deals, family offices are ensuring that everyone is working towards a common goal. This not only motivates employees but also fosters a sense of ownership and loyalty within the organization.
Types of Compensation Plans
McCurry outlines three common ways in which family offices are compensating their staff with deal and equity plans. The first method is through profits interests, where employees receive a percentage of the profit generated from a deal. This aligns their interests with the success of the investment while also providing tax advantages. Co-investments are another form of compensation, allowing employees to invest their own money alongside the family in deals. This strategy not only incentivizes employees to make sound investment decisions but also exposes them to potential downsides.
For family offices with complex structures that make it challenging to issue profit shares or co-investments, phantom equity offers a solution. This form of compensation involves granting employees notional shares that track the performance of a basket of assets or funds. While it provides simplicity and tax deferral benefits similar to a 401(k) plan, it may ultimately be taxed at ordinary income rates, making it less appealing to employees.
As family offices seek to attract top talent in a competitive market, offering various forms of equity is becoming essential. McCurry emphasizes the importance of keeping up with industry trends, stating that the more family offices incorporate equity and profit-sharing into their compensation plans, the higher the expectation from employees. By providing employees with a stake in the success of the family office, organizations can create a sense of ownership and alignment that drives performance and long-term growth.
The landscape of family offices is evolving, with equity and profit-sharing becoming key components of employee compensation. By adapting to the changing demands of the market and offering competitive pay plans, family offices can position themselves as attractive employers in the competitive world of finance.