Apr 29, 2013 | Performance
While cash compensation is certainly front of mind for most individuals working in the private equity and venture capital industry, training can also be an important piece of overall compensation with significant advantages for both individuals and their firms. With advantages to the firm including increased productivity, increasing firm skill and “bench strength,” and higher retention, its easy to see why funds are looking at options for providing increased training opportunities to their teams. And the team members are appreciating the training as well, with indicators of higher job satisfaction and loyalty.
Many private equity and venture capital firms are smaller in size and struggle justifying the sometimes considerable cash cost of training, especially in a market increasingly moving to a lower fee model. However, these are also firms most well positioned to take advantage of training opportunities. In many of these firms, one or two specialists tends to look after certain firm responsibilities, creating issues when these people choose to depart or become overwhelmed. The firm then needs to desperate seek out a replacement or support, which of course is costly and doesn’t always result in a good fit within the team. Providing training to existing team members to ensure bench strength exists and employees are able to cover for each other, at least in the short term, can provide significant value.
While all employees tend to enjoy the opportunity of expanding their knowledge, young employees who are early in their careers, often stand to gain the most from training and also tend to put greater emphasis on this benefit. In fact, attracting young employees out of school or those with only a few years of industry experience may be easier with a strong reputation as a firm who will help employees build their knowledge. Providing training to young employees will also enable them to see a clear path for advancement within the firm, creating loyalty and also potentially lower recruiting costs for higher positions by promoting from within.
Many firms also worry that training their employees will lead them to seek opportunities elsewhere, losing the value of their investment in training costs and time. This is a valid concern and certainly a number of employees will leave after undergoing training. However, even more employees tend to view the investment by the firm in their skills to be an indicator of loyalty, encouraging them to stay on and seeking potential advancement.
Private equity and venture capital firms certainly do stand to benefit greatly by increasing training programs, especially in areas where it can expand the firm’s internal skill set. As a result, expect to see more teams look to training as a key component of their development plans, while more employees will come to demand training as a core component of their overall compensation.
Apr 15, 2013 | Culture
In light of a more optimistic economic outlook, private equity and venture capital firms are increasingly looking at hiring to fill their ranks. As the job market becomes increasingly competitive, these firms have to become more creative in order to ensure they attract the most talented individuals. While a large compensation package and the prestige of working for top firms will appeal to many job seekers, firms are looking to expand their offerings beyond the traditional lures and are now addressing work life balance in order to attract and retain top talent.
One trend we’ve seen over the past couple of decades is the increasing importance that individuals put on work life balance. In the past, many workers focused solely on earnings potential, but younger generations are not so quick to trade their time for higher pay. In order to address this shift in preferences, firms are looking at ways to offer more flexible schedules and work arrangements, reduce time spent in the office while considering providing more vacation time.
These types of changes reflect a focus on attracting and retaining young workers, individuals that may have obligations raising a young family or taking care of aging relatives. Firms that chose to be more flexible in dealing with employees are at a marked advantage in attracting and retaining those from this high prized demographic group.
While we are seeing improvements, the financial industry has been a slow adopter of work life balance measures in comparison to the overall corporate world in the United States. Some of this is due to simple realities of the business; rigid trading hours still exist and for many positions, people need to be on the desk for a certain amount of time per day. For non-trading positions, however, much of the lack of progress in shifting to a more balanced employment model is cultural. In most firms, working long hours is a badge of honor and more senior employees and managers view time at the desk as a critical measure for advancement.
While this culture of long hours may still exist at most firms, the reality is that in an environment where fee revenue is harder and harder to come by, firms must look at work life balance as a part of an overall compensation package in order to reduce or limit cash costs. As a result, and following an overall trend amongst U.S. companies, we can expect greater focus on this core benefit in the coming years.
Apr 1, 2013 | Industry
The outlook for employment in the private equity and venture capital industry is quite bullish for the coming year according the results of our 2013 compensation report. As the industry ramps up in the wake of stronger economic fundaments around the world, firms are increasingly looking at adding new talent to their ranks, essentially showing increased hiring intentions in all disciplines. Whether one is looking to enter the industry for the first time, or perhaps move to a new firm for different opportunities, 2013 is shaping up to be a good year to execute on those plans.
Overall, we found a considerable increase in hiring intentions in both private equity and venture capital firms for the coming year. According to our respondents, 59 percent of firms will be looking at add new investment professionals and support staff this year. This is up sharply from only 37 percent last year. This reflects the strength of both private equity and venture capital as the global economy finally begins to sputter forward.
It is also important to note that this remarkably strong level of hiring intentions is not to be found throughout the financial industry, where many segments, such as investment banking for example, continue to struggle for grow their revenues in order to support the addition of new staff. Private equity and venture capital continue to offer a relative haven within the over industry, providing opportunity for many financial professionals that are struggling to gain traction in other segments that are on the decline.
Hiring intentions weren’t the only positive development that our survey picked up this year. We also found a considerable reduction in firms that are looking to reduce headcount this year, with only 2 percent of firms are looking to employ fewer financial professionals in 2013. This is an important trend as employees in the industry are concerned about firms increasingly seeking efficiencies and implementing technological solutions that could allow the firm to operate with a smaller staff. These results imply that any gains in efficiency are quickly being offset by business growth.
The strength of hiring intentions depends on which skillset an employee is bringing to the firm. The most in demand skillset, unsurprisingly, is investment professionals. Also in demand are accounting, operations and portfolio management professionals. According to our survey, firms are looking less often in 2013 for those with skills in IT and investor relations.
Mar 25, 2013 | Culture
When it comes to reasons why individuals choose to work in the financial industry, job security is often pretty low on the list. Compared to jobs in the corporate world or in government, there simply isn’t as much certainty surrounding whether or not an employee will be staying beyond the next paycheck. Performance, both of the individual and the firm, weigh heavily on future employment prospects. That said, feelings around job security are an important measure of the health of the private equity and venture capital industries.
In our 2013 Private Equity and Venture Capital Compensation report, we took a hard look at how employees felt about their job security, and the reasons behind why they felt secure in their roles, or were anxious about their future. Overall, we saw an increase in positive feelings around job security, with 55 percent of respondents this year suggesting that they were not concerned about being let go in the near future. This compares quite strong to last year when less than half of respondents were unconcerned about their continued employment prospects at their firm. This considerable jump in positive outlooks amongst private equity and venture capital employees reflects well on the health of the industry, and increased competition to attract and retain top talent.
On the other hand, 40 percent of respondents were somewhat concerned about their employment outlook for 2013. In addition, 5 percent were “very concerned,” reflecting considerable doubt about the ongoing engagement with their current firm. Amongst those that were concerned about their job security over the next year, there was quite a divide in terms of the reasons behind those fears. Perhaps surprisingly, only 10 percent of respondents were actually concerned that their own performance could lead to their imminent dismissal. On the other hand, a full 74 percent were more concerned about macro factors facing their firm or the entire industry. 45 percent of respondents indicated that their firm’s fundraising ability was the main source of their worry, while 29 percent pointed to overall market conditions as the leading reason they would lose sleep over their job prospects.
On the other hand, those not overly concerned about their job security reported their own performance as the most likely cause of their downfall in 2013, if it were to occur. Changes to firm structure and market conditions were other leading reasons why the lesser concerned respondents felt could influence them to be increasingly concerned as the year rolls on.
Overall, this segment of our compensation report reflects an industry that is getting stronger as it moves forward from years of significant struggles. Increasing job security is just one aspect that reflects a tighter labor market as firms scramble to obtain top talent. As long as economic fundamentals remain steady in 2013, we expect to find employees becoming increasingly comfortable with their job security as we move through this year.
Mar 18, 2013 | Culture
Not unlike much of the financial industry, those working in private equity and venture capital careers don’t take a lot of time off. Unsurprisingly, the amount of vacation taken has not changed dramatically over the last several years, despite employees receiving greater vacation allowances in their compensation packages.
In terms of vacation allocations, private equity and venture capital do offer some of the most significant packages in the financial industry. Over 80 percent of respondents to our survey this year indicated that they earned three weeks or more of vacation time, largely consistent with the results of previous years. We did notice a trend, however, that firms were increasingly offering four or five weeks of vacation, offset in some cases by firms that have reduced entitlements below three weeks. Generally, there is wide disparity between vacation packages within the industry so it’s certainly worthwhile to ensure this aspect of compensation is accurately stated and discussed when determining overall compensation.
Geographically, vacation entitlements vary between countries. We saw the highest vacation entitlements provided by continental European companies, while the lowest amount of vacation time was found to be offered by U.S. firms. Other countries such as Canada would fall between the two extremes. This largely follows cultural norms surrounding vacation time.
Unfortunately for workers, the amount of vacation time taken was generally significantly less than the time earned. On average, those working in private equity and venture capital took just over two and half weeks of vacation. On the other hand, on average, these same employees earned three and a half weeks of vacation. These findings suggest that most employees only take about three quarters of the vacation time offered to them, with the remaining amount being banked for future years or paid out in cash.
As a general trend across all industries, companies are increasingly finding that offering appropriate work-life balance to their employees results in a number of positive outcomes for the firm. This includes higher productivity amongst employees when at work, reduced burnout and lower turnover. It seems as though the financial industry is beginning to catch on to these trends, although as a late adopter. While policies are beginning to shift, the internal culture at most firms will take much more time to adapt. Increasing vacation allowances will not have these positive benefits unless employees feel that they can take advantage of their time off from work. Our survey results show that cultural shift has been much slower than the shift in firm policy.
Mar 11, 2013 | Industry
When it comes to compensation differences between private equity and venture capital firms, our survey found some interesting trends. In 2012, financial professionals were much better off, on average, in terms of compensation when working for a private equity firm than for a venture capital firm.
Differences were most noticeable at the top of the corporate ladder. At the principal level, an individual working in private equity could expect to earn approximately $450,000 a year, while his peer in venture capital would expect, on average, approximately $210,000 per year in total compensation. At the managing director level, the same trend was apparent, with the private equity employee earning about $200,000 more per year on average than a comparable individual in venture capital. Even at the lower levels within the organizations, compensation differences were certainly visible. At the associate level, the private equity employee could expect to earn approximately $30,000 more per year than a comparable employee working in the venture capital space. The gap declined substantially at the senior associate level, however, and then began to increase again as we surveyed the more senior ranks.
At both the top and bottom of the organizations, those working in firms that handled both private equity and venture capital type activities tended to be compensated more in line with the higher paid private equity employees. This is not unexpected, as most firms that operate in both spaces would generally describe themselves as a private equity manager first, with venture capital activities providing a secondary role.
In both private equity and venture capital, we did see increases in year over year total compensation, primarily related to bonuses. This reflects an overall shift within the financial industry to more performance based compensation, more closely aligning firm results with the results of investors.
Reason for Differences may relate to Firm Size, Location
The reason for these differences is unclear, but there are a few reasonable hypothesises available. First, private equity firms tend to be larger in size, and elsewhere in our survey, we found those working for larger firms to be paid more than those working in smaller outfits. In addition, private equity firms are, in general, more likely to be located in traditional financial regions such as New York, which generally have higher costs of living and therefore higher expected compensation. While these reasons are certainly not conclusive, they may provide some hints to what drives the compensation gap.
Mar 4, 2013 | Culture
There is generally no illusion among those entering the financial industry that most jobs will require incumbents to put in long hours, with little in terms of initial vacation allocations. This has been a fundamental reality of all segments of the industry for over a century and has changed very little even as other industries have progressed to focus more on work-life balance.
Our survey results are consistent with this understanding, showing that the majority of employees in private equity and venture capital firms work over 60 hours per week. This is little changed from prior years. There has also been little change at the lower end of the spectrum when it comes to hours worked. Only 10 percent of employees work fewer than 50 hours per week and an even smaller 2 percent of employees work less than the standard 40 hour work week. These results reflect upon an industry that has changed very little when it comes to flexible employment arrangements, due to both culture and job performance realities.
Further, our results show that firms reward those that burn the midnight oil, with a strong correlation between hours worked and total compensation. Those working more than 90 hours a week on a regular basis earned on average over one million dollars per year, while their peers that pushed 80 to 90 hours per week came in just over half a million dollars per year on average. On the opposite end of the scale, those working a standard 40 to 49 hour work week earned $246,000 per year on average while those working a very progressive less than 40 hours per week earned only $167,000 on average. This clear correlation between hours worked and compensation relates both to the time demands of senior private equity and venture capital positions as well as a strong linkage within company cultures between hard work and high pay.
Whether the private equity and venture capital industries will see a shift to more progressive working arrangements in the future remains to be seen, but there is little indication that any shift is underway. Many employers outside of the financial space are beginning to see that a stable work-life balance creates healthier employees (both mentally and physically) and drives higher productivity per hour worked. The flip side of course is that more employees are required to accomplish the same number of tasks if average hours are slashed in half, even with productivity gains, and this is something many cash strapped firms try to avoid. For those considering a transition to this industry, they should be aware that long hours will be required in order to reach top paying positions for the foreseeable future.
Feb 25, 2013 | Firms
When it comes to private equity and venture capital careers, the size of the company you work for is a key variable in determining how much you’re likely to be paid. According to the findings of our 2013 Private Equity and VC Compensation Report, those working at large firms, defined as those with greater than $1 billion in assets under management, expected to see 81 percent more compensation on average than their small firm peers. While this number may seem shocking on the surface, this is a composite of all respondents. When we compared similar titles, the results were less dramatic, especially at the lower levels of the firm.
Base Salaries Higher in Large Firms
The first place we looked when analysing the differences in compensation by firm size was in base salaries. Here, we found that as firm size increased, base salary also increased. However, the difference was relatively small compared to bonus compensation. There was very little difference in base compensation for employees working at firms with under $200 million in assets under management and those working at firms with $200 million to $1 billion in assets under management. We did notice however a slightly more significant jump as firms crossed the $1 billion mark.
Firm Size More Relevant when it comes to Bonuses
Unlike base compensation, we found a much large disparity when it came to bonuses. Interestingly, small firms actually outperformed their mid-sized peers in 2012. This reverses the trend of the prior year where small firms were the lowest performing when it came to paying out incentive compensation. This is likely due to successful results within the private equity and venture capital industries, as small firms generally have more compensation tied directly to investor results, especially for senior leaders.
Large firms however outperform both their small and medium sized peers by a large margin. The average bonus in a large firm exceeded $250,000 in 2012, compared to an average bonus of just under $100,000 for a small firm. This is a substantial difference and it likely reflects the simple financial reality that large firms have more client dollars per employee that can be paid out in compensation.
Much of the differential in pay came at the higher levels of the organization. Analysts and associates saw marginal increases in pay as firm size increased, but certainly not as significant as senior leaders. Directors and principals saw the biggest pay differentials as firm size increased. This partially reflects the wider scope of responsibility that fund executives have in large firms.
Feb 18, 2013 | Performance
Across the financial industry, we’ve seen an overall shift to tying bonuses more closely to the firm’s results for its investors. Whether an investment banker is driving corporate profits for shareholders or a private equity fund manager is beating the benchmark for his clients, this trend remains evident. This was clear in our survey of private equity and venture capital professional, where we saw that respondents in low performing firms were no long expecting large bonus checks, while those in exceptional firms were demanding large payouts. It seems that investors will have to live with the reality cutting both ways, perhaps saving on fees during times of weak performance while expecting to pay more for results that exceed industry averages.
Private Equity and Venture Capital Fund Performance Expected to be Stronger in 2012
The expectations for fund performance were considerably improved in our most recent survey in comparison to the previous year. A very solid 80 percent of respondents expected a positive year for their fund, up from only 73 percent in the year prior. On the negative performance side, only 6 percent of respondents expected their firm to post a lost in 2012, which compares favorably to 9 percent in the year prior. Many funds were expecting outstanding performance as well, with over half of respondents indicating that they expected their fund to return over 10 percent for the year. This would mark a substantial jump over 2011 levels and also would indicate outperformance compared to many alternative asset classes.
Expected Bonuses Generally Follow Fund Performance
In our survey, we noticed that expected bonus payouts for the year generally trended in line with fund performance. For example, for funds that were expected to return between 10 and 25 percent in 2012, the average bonus expectation was approximately $175,000. In a fund where returns were expected to be even, the average incentive payment was predicted to be only in the range of $60,000. The expected payout falls even further once a fund begins to lose value, with the average expected payout for a fund losing greater than 10 percent estimated at only $11,000. This dramatic difference between bonus payouts is indicative of the shift in corporate compensation discussed earlier.
As we continue in an environment with generally low overall returns, fees and performance will become increasingly important for individual and institutional investors alike. Accordingly, compensation is going to be increasingly tied to fund performance, especially at the higher levels of the firm where the large bonuses are paid.
Feb 11, 2013 | Industry
Increases in compensation on a relative basis in the private equity and venture capital industries were fairly similar across the board in 2012, regardless of an individual’s position within the firm. According to our survey all employees, regardless of job title, saw an average increase in pay over the last year. While clearly increases would be nominally larger for those at the top of an organization, as a percentage of 2011 pay we saw fairly even distribution amongst most roles within our surveyed private equity and venture capital organizations.
Managing Partners see the Biggest Jump
The one major exception in our report was Managing Partners, who saw the biggest increase in compensation in 2012. Interestingly, this job title was the segment that saw the largest decrease in 2011, indicating the highly variable nature of pay in this role. In private equity and venture capital, these roles are compensated primarily through incentive pay which fluctuates alongside firm performance, which explains the substantial shift year to year. It’s an important reminder that while those at the top levels of an organization do earn exceptional compensation, it’s far from reliable in times of performance volatility.
Chief Financial Officers also beat the Average
Another role in which we saw a higher than average increase in pay was Chief Financial Officers. This change in pay likely reflects the growing regulatory burden placed upon hedge funds. For most jurisdictions today, Chief Financial Officers bare personal financial and legal responsibility for the financial reporting of their firms. As a result, individuals in these roles are demanding higher pay in order to compensate for their personal risk.
In addition to the added personal liability of the CFO role, the increasing regulatory and financial reporting burden itself is adding considerably to workload as well as staffing levels in terms of direct reports, which also warrants a higher level of compensation.
Outlook for 2013 Remains Positive
Our survey found that the majority of respondents, again across the organization, felt that the trend towards higher compensation would continue in 2013. With private equity and venture capital remaining a “go-to” choice for institutional and high net worth investors, these expectations are very reasonable. As the sector continues to expand, the demand for highly experienced professionals with direct experience will grow along with it, driving compensation higher. Whether you’re an analyst or an executive, you’ll stand to gain from the overall strength of the industry.
