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A host of macroeconomic factors and geopolitical shifts have prompted family offices to become more institutionalized. Family offices are increasingly adopting robust governance structures, strategic human capital plans, family vision, values, and mission alignment programs to keep the family thriving for generations.
This elevated level of sophistication encompasses compensation. Family Offices are recognizing the power of a thoughtfully devised compensation plan as a tool to drive behavior and incentivize excellence. The strategic use of long-term incentive (LTI) plans, among others ensure effective governance and engender cultures of continuous improvement.
The modern family office platform
Once considered a cost center to be managed, the modern family office platform offers an attractive career proposition and competes with elite private equity firms and Wall Street for talent. Family offices provide incredibly dynamic trajectories and creative compensation structures, typically comprising a base salary, formulaic bonus structure, and long-term incentive plan, often outpacing the general market in terms of upside potential.
LTIs are increasingly being adopted by family offices and applied beyond the C-suite to a host of critical roles on the operational and administrative side of the ecosystem. The three most prevalent plans used in the market today are supplemental deferred cash, co-investment opportunities, and carried interest, although the scope of plans being used in the market may also include profit sharing, phantom equity, and stock options. These plans allow family offices to drive performance behavior in alignment with their objectives over a long-term time horizon, and top talent to participate pari-passu in investments, generating their own portfolio of long-term wealth.
Aligning interests and driving behavior
Compensation is not just a staff incentive tool but a strategic organizational governance mechanism that ensures longevity and continued excellence—it can drive desired behaviors in stakeholders by being tied to relevant benchmarks as well as less tangible metrics such as values-based decision-making and guiding the next generation.
To be successful, these compensation plans must align with the compensation philosophy of the family and the individual. This requires an assessment of the individual’s current and expected compensation structure and time horizon parameters, and an evaluation of how their experience and expectations align with what the family office deems appropriate. What are the professionals’ expectations? What will incentivize long-term performance and encourage decisions to be taken in alignment with family objectives?
Interpreting benchmark reports
Several benchmark reports are now available in the market, making family office compensation data broadly accessible. However, many of these quantitative reports require additional apples-to-apples comparative information to appropriately interpret and evaluate the data to make informed decisions. This includes the scope and complexity of job content, decision-making, and responsibility. Best practice is to engage expert advice when devising compensation strategies and plans.
The heightened focus on professionalism, business sophistication, and alternative investments has increased the demand for experienced, technically skilled, and culturally aligned family office professionals, and spurred talent migration from the institutional to the private family office market. This, in turn, has driven the upsurge in incentive compensation packages, including the adoption of LTIs and the incorporation of well-defined performance metrics in the structure of such plans.
Compensation is one of the most important tools in the family office toolkit. It is imperative that you have confidence that you are utilizing yours effectively to attract and retain the best talent.
About Mack International LLC
Mack International is the premier boutique retained executive search and strategic management/human capital consulting firm serving national and international clients in the family office, family business enterprise and the wealth management industries on a national and international basis. Founded in 2002, the firm has achieved an exceptional track record of success as evidenced by its unmatched industry expertise, in-depth market knowledge and unparalleled track record of success. Founder and President, Linda C. Mack has established proprietary methodologies such as the Mack 360© and is credited for having coined the term “expert generalist” in the industry.
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