PE staff kept in the dark about incentives

Private equity professionals participating in carried interest schemes are rarely provided with estimates of the likely size of any incentivisation package.

Even though carried interest is widely seen as a vital weapon in private equity firms’ ability to attract and retain top staff, a study has found members of carry schemes are rarely updated on how much they are likely to be worth.

Mergermarket, the M&A research database, and Private Equity Recruitment (PER), a headhunting firm, based their Private Equity Salary Survey on telephone conversations with 160 UK private equity professionals in the first quarter of 2006.

The survey found that 80 percent of these professionals were participating in long-term incentive schemes – mainly carried interest programmes – but that 90 percent of them were unable to quantify the value of their incentives. In addition, fewer than half said they understood how their bonus was calculated.

With carry schemes, the precise value of any profits accruing cannot be known until realisations are made. Nonetheless, in commenting on the findings, PER director Gail McManus urged the industry to take the issue more seriously. “When a firm estimates the value of incentives based on their best knowledge and communicates that to the team, individuals will have a much better understanding of their likely reward. But we found that such estimates are not regularly made.”

McManus suggests that participants in carry schemes should periodically receive a valuation of their incentivisation scheme (or perhaps a range of values, with the percentage likelihood of achieving each value), together with the expected length of time before entitlements can be accessed. She says members of such schemes are sometimes only made aware of the value of their schemes for the first time once they have received an offer to move elsewhere and decide to compare what’s on offer with what they currently have.

The survey also revealed that it’s best to be employed by a large buyout firm if money’s all that matters. In funds with £500 million or more under management, around 25 percent of the team has a base salary in excess of £150,000, compared with around 10 percent for funds with less than £500 million under management.

There is also a sharp dichotomy when it comes to bonuses, which are worth less than 10 percent of base salary in sub £100 million funds, but more than 100 percent in £1 billion-plus funds.

“As the amount of private equity money increases, so the remuneration gap between large and small funds becomes increasingly apparent,” says McManus. But she insists that “the attractions of the job in terms of creativity, flexibility and the ability to influence businesses mean it is not all about money.”