Feb 4, 2013 | Firms
One the major drivers of pay levels in the private equity and venture capital industries is the size of the firm. Firm size has a number of impacts on compensation, from the overall stability of the firm, to level of responsibility assigned to each employee. Generally, larger firms have a more stable client base and therefore more reliable revenue. This allows larger firms to offer more salary based compensation.
On the other side of the equation, in a larger firm, individuals generally operate in specialized roles, without the broad span of responsibilities that those in small firms. The requirement to have a broader business focus and greater responsibility often drives increased compensation demands in smaller firms. The way that small firms meet this demand though is generally through bonus compensation, as their smaller client bases don’t necessarily afford the same level of financial stability to the firm.
Employees at Small Firms saw Higher Compensation in 2012
In 2012, our survey found that the level of compensation within very small firms was increasing at a rate that far outpaced mid-sized and large firms. In past years, compensation had been led by mid-sized firms, offering a balance between span of responsibility and firm financial stability. This year, compensation was led by firms with between one and ten employees. Also interesting was the fact that these small firm employees reported higher salary based earnings than their big firm peers. This may be reflective of small firms recognizing the fact that workload and responsibility is generally greater in small teams, and additional compensation is required in order to retain top talent.
Bonuses were also higher in small firms, but this should come as little surprise as private equity and venture capital firms start to post stronger results. Bonuses are more volatile in small firms due to small revenue bases, and so employees expect to see considerable bonuses in the good years to offset thinner compensation in weak years. The continued strength of the industry should bode well for bonuses amongst small firms in the years to come.
Large Firms may remain most stable
Large firms remain the most stable in providing consistent salary and bonuses to employees. Employees of firms with over 100 staff may not experience the high end bonuses received by small firm employees in good years, but they also don’t have do without during weaker years. Less responsibility and more ability to specialize are also attractive features to some in deciding what firm to work at, and these are qualities that large firms provide. Benefits such as higher vacation are also easier for large firms to deliver, and should be factored into any employment decision.
Jan 28, 2013 | Bonuses
In both private equity and venture capital compensation, disparity remains a key trend when looking at average salaries by position level. While much of this difference is due to the increased responsibility, time commitment and required experienced level of higher level positions, structural differences in compensation also are a contributing factor. This is not a new trend in private equity nor the financial industry as a whole, as the top few individuals do tend to reap the majority of the rewards of a successful operation.
We also found the range of salaries is greatest in the higher levels of an organization. At the analyst level, the vast majority of individuals are paid within a 10 percent range of the average salary. This climbs at the associate level to a 28 percent range. Ultimately at the Managing Partner level, the range approaches 100 percent, with a great number of positive outliers.
Risk Based Compensation Higher amongst Firm Executives
The division between base compensation and bonuses is very clear between the upper and lower levels of a private equity or venture capital firm. At the analyst level, approximately a quarter of total compensation comes from risk based paid (bonuses). This climbs to nearly half of total compensation at the upper levels, from Managing Partners to Principals. In highly successful firms, those at the upper levels of the organization would see an overwhelming majority of their compensation coming from incentive pay.
Ability to Influence Firm Results Rests at the Top
The existence of more risk based pay for those at the higher levels of an organization should not be surprising. This is certainly not a trend unique to the private equity and venture capital industries, but rather exists across the board. The reality is that top executives generally have more ability to influence the results of the organization, whether through setting sound investment and portfolio management practices or through business development activities.
In the early stages of fund development, these executives generally have sacrificed a great deal of compensation, leaving high paying positions as experienced industry professionals for uncertain outcomes in small startup funds. Accordingly, higher compensation once the firm enjoys success remains an important incentive for those moving to upstart firms.
While it’s true that most analysts and associates don’t enjoy large scale payouts like firm executives, junior members of an firm that do have a substantial impact on firm results are also generally well compensated for their efforts, or even see promotion.
Jan 21, 2013 | Industry
Last year was certainly a lucrative one for those employed in both the private equity and venture capital industry, where we saw a substantial increase in optimism surrounding compensation in 2012. In fact, 62 percent of those employed in the industry were predicting higher total compensation for 2012 compared to their 2011 earnings. This is a large jump from the level of optimism we saw in the previous survey, where only 46 percent of individuals were expecting an increase in their compensation. In fact, it was such a lucrative year for professionals in the industry that nearly 50 percent saw an increase in their pay of more than 10 percent.
While much of the financial industry is facing consolidation, layoffs and compensation freezes, the private equity and venture capital industries have remained fairly resilient over the past several years. We’ve even seen increased hiring intentions from the majority of firms we surveyed. As competition heats up for talented and experienced professionals, compensation within this industry should continue to climb.
In a study conducted in early 2012, EisnerAmper found that 37 percent of private equity firms were looking to hire, while only 7 percent were looking to slash staffing levels. This contrasts dramatically with investment banking, where the vast majority of large firms are reducing their headcount. Some of the increase in private equity and venture capital hiring comes from increased regulatory compliance, something that these firms certainly did not have to focus on as extensively in prior years. Our numbers show even stronger hiring intentions as last year came to a close, indicative of a strong 2013 ahead.
When this year does open with some promise, we may not see as dramatic an increase in compensation in these industries as we would be expecting. While there may be many openings, there is also a large candidate pool as many professionals from investment banking or other depressed financial sectors look for new opportunities. While highly experienced private equity professionals will certainly see financial rewards due to the expansion of the industry, those will less experience will be competing against refugees from the investment banking industry. This may weigh slightly on compensation, but likely only for lesser experienced professionals.
As 2013 shapes up to be another positive year for the private equity industry, we can expect to see the positive trend continue in the coming months. More professionals will be expecting compensation increases as competition heats up for their valuable skill sets. As long as the private equity and venture capital industries can maintain their value proposition to individual and institutional investors in this time of low yields and high volatility, the employment picture should remain bright.
Jan 14, 2013 | Bonuses
Bonus payouts have always been a substantial component of total compensation in both the private equity and venture capital industries. Bonuses tend to increase as a percentage of total compensation as one’s seniority within a firm increases. High performers in top leadership roles can sometimes expect up to 70 percent of their compensation to come in the form of bonus pay.
In 2012, we found that project bonuses averaged about 36 percent of total compensation, reflecting lower percentages of compensation paid as a bonus in the lower ranks of a firm. Overall, both base pay and bonuses have been increasing, which indicates a healthy private equity and venture capital industry, with plenty of competition for highly talented or experienced individuals.
Firm Performance is Critical in Increasing Bonus Payments
Of course, bonus payments are generally tied to the performance of the firm. Over the past few years, we’ve seen increasingly strong results from a number of private equity funds, which is in turn creating the opportunity for higher bonuses in the sector.
Increasingly, investors are demanding that more compensation is tied to the private equity or venture capital fund’s actual results. This is in contrast to past practices where bonuses were more viewed as an expected component of compensation, rather than a reward for outstanding achievements. In light of the current investment environment where low yields are becoming the new normal, investors are being increasing demanding in terms of fee reductions, unless they are earning returns that can justify higher payouts. In an industry where the greatest expense is people, compensation will need to be tied more closely to performance in order for firms to remain competitive with their fee arrangements.
Composition of Bonus is Important for Job Candidates
When candidates are examining competing job offers, it’s important to take a look at how bonus payouts are calculated, rather than just target levels. Is the bonus linked to reviews of personal performance? Or will you be compensated based on the investing success of the overall firm? If based more on the later, candidates should examine the past performance history of the firm in question, as well as their outlook for the coming year, in order to determine how much of their target bonus (or more) will they likely receive.
Increasing Bonuses Expected to Continue into the Future
Based on the expectation that the economy is likely entering a prolonged period of lower total returns, it seems as though the shift to bonuses as a greater percentage of compensation will continue. Within new fee arrangements, based more upon performance, firms simply cannot afford the risk of high salaries that are not linked directly to the way they are paid themselves by clients. Accordingly, as management fees become more tied to successful investment results, those employed at private equity and venture capital firms will see their pay become more based upon performance incentives.
Dec 30, 2012 | Industry
The 2013 Private Equity and Venture Capital Compensation Report demonstrates that the private equity and venture capital markets are continuing to enjoy increases in compensation and that 2013 will bring additional compensation increases.
Less Focus on Financial Engineering
Years ago, the upside in private equity was achieved primarily through financial leverage… LBO’s were the key to return on investment. Today, with aging portfolios, firm’s are focusing on the long term success of portfolio companies. Firms are assembling appropriate capital structures and teams to execute a long term growth plan.
Deal structure is only the beginning. The combination of cost savings from operational improvements and increased top line performance result in tremendous margin growth and increases in company value.
Good Times for Private Equity
It seems this new focus in private equity has resulted in a competitive market for talented investment professionals. More than half of respondents expected their cash compensation to increase over last year, and more than 40 percent expected to wrap the year end with double digit increases.
Private equity professionals reported increases in both base and bonus compensation. The average professional earned over $270,000. Bonuses comprised over one third of this year’s mean cash compensation, with the highest earners realizing bonuses that made up more than 60 percent of their total cash compensation.
This year, even professionals at small firms reported higher base and bonus compensation. This is likely due to the new competition for these talented professionals.
Romney Raised Awareness of Private Equity
The 2012 presidential election brought with it discussion about the value of private equity in terms of its contribution to job growth and overall economic benefit. Despite democrats trying to paint private equity firms as single-minded entities willing destroy companies in effort to maximize return on investment, the reality is that these firms focus on growth, benefiting both the shareholders and employees.
The industry is performing well and has a positive outlook for 2013 and beyond. Professionals will continue to see healthy increases in base salary and, as long as portfolio companies continue to grow, bonuses will follow suit.
About The Report
The 2013 Private Equity Compensation Report is based on an industry survey conducted in October and November 2012. Data was collected directly from hundreds of private equity and venture capital partners and employees. The full report can be found at http://www.PrivateEquityCompensation.com
The Report has grown to be the most comprehensive benchmark for private equity and venture capital compensation practices. Some of the participating firms over the years include: Actis, American Capital, Bain Capital, Battery Ventures, BlackRock, Carlyle, Century Capital Management, Cerberus, Comcast Ventures, DuPont Capital Management, EdgeStone Capital Partners, GE, Highland Capital Partners, Hilco Consumer Capital, Intel Capital, Mission Ventures, Mohr Davidow Ventures, North Atlantic Capital, RBS, Safeguard Scientifics, SV Life Sciences, Siemens Venture Capital, and Wellington Partners.
Jun 25, 2012 | Firms
One of the biggest draw cards to working in the private equity industry is often the large salaries on offer, with average compensation exceeding the $200,000 mark. However, the big compensation offered can often make it difficult to break into the industry, particularly with the top firms and largest funds.
One of the most common questions for those within the private equity industry is ‘Is it really worth the effort to work for larger funds?’. Before you decide to pursue the greater responsibilities and challenges of large funds, you need to identify the value to your career and to your bank account.
After thoroughly researching private equity remuneration, we found that fund size has the ability to affect your pay substantially. No matter where you are in your private equity career, the good news is that working with a larger fund will dramatically boost your salary.
Here are some highlights from the 2012 Private Equity Compensation report:
For those in the earlier stages of their private equity career, fund size doubled compensation.
- Analysts working with large funds (over US$500 mil) received over 89% more compensation than those working with small funds (under US $100 mil)
- Associates working with large funds (over US$500 mil) received 100% more compensation than those with small funds (under US $100 mil) – double the salary of an associate with a small fund
However, the effects of fund size on compensation aren’t just beneficial for analysts and associates. Salary increases were still considerable for all positions in the typical private equity firm:
- Senior associates with large funds had 63% higher salaries than those who worked with small funds (under US $100 mil)
- Directors had a significant pay jump of over 67% when working with a large fund (over US$500 mil), compared to directors working with small funds
- Vice presidents have the biggest increase in compensation: a 191.66% rise in salary
If a higher salary is what you’re looking to achieve, a strategic career move to a larger fund will help you reach your compensation goal. While there will undoubtedly be greater responsibilities associated with the pay increase, working with larger funds will help your bank account, as well as your career by assisting you to develop your skills.
May 25, 2012 | Industry
The private equity industry in the United States seems to be reaching maturity, as many new firms launch stabilized, ready-to-invest capital in the billions of dollars (nicknamed “dry powder”).
Fund-raising activity has continued through 2011, as smaller funds do most of the fundraising activity despite the fact that larger funds picked up most of the capital available. This demonstrates the imbalance in the private equity industry, with the average private equity firm on their first or second fund, typically with fund sizes of less than $500 million.
The days of focusing on financial engineering to the detriment of operational improvements are now over. The new focus of the typical firm is on cutting costs and increasing portfolio revenues. For private equity professionals, this means that operational management skill sets are increasingly in demand.
What These Changes Mean for Your Compensation
Now that the industry is maturing, private equity professionals can expect some positive changes to their compensation packages. Our research has indicated an optimistic outlook for salary and bonus increases, with most private equity and VC professionals experiencing a solid level of earnings in 2011.
Compensation for almost every level of professional, from employee to partner, has increased, with many benefiting from double-digit increases in compensation. The annual average compensation for private equity and VC professionals increased 6 percent to $248,000 USD.
What to Expect at Smaller Firms
The trend towards higher compensation is benefiting employees at firms of every size. For smaller firms (less than 25 employees), total compensation has also increased dramatically. As larger firms pick up their hiring, smaller firms have needed to adjust their remuneration packages or risk losing talent.
Salary Increases in 2012 and Beyond
The good news for private equity professionals continues: We expect that these trends will continue to increase total compensation throughout 2012. More than 40% even expect double-digit increases, with most professionals looking forward to a pay rise of some sort this year. While not all workers are expecting a pay rise, these trends are helping to stabilize the industry and provide an overall highly positive outlook for the future.
Mar 18, 2012 | MBA
Professionals looking to advance their private equity careers are often advised to earn an MBA degree. An MBA is often considered essential to business success in the real world, with many professionals feeling the pressure to complete one for better careers success.
However, an MBA is a significant investment in terms of financial cost, time, and effort. With an MBA degree typically taking up to two years of full-time study, it’s critical to first analyze how much it will really help your career and compensation.
Will an MBA increase your total compensation?
Our 2012 Private Equity Compensation Report research found that while MBAs are an advantage, the pay difference is not significant. Particularly for those with over 5 years experience, an MBA certainly does not guarantee better compensation.
In 2011, MBA’s earned 13% more in base salary on average, but received no higher bonuses than those who didn’t have the degree. With the average annual compensation for private equity and VC professionals currently at US$248,000, this equates to a pay difference of roughly $32,240. Compared to the cost of earning a MBA, this may not make the degree as attractive an option for private equity professionals.
While having a MBA can be helpful in the long-term, it can also hurt your chances at new opportunities or pay rises, if your degree isn’t from a top business school. Seth Levine, a top venture capitalist, believes that going to a non top-10 business school will actually hurt your career.
According to Levine, “I know of several firms that simply won’t even consider associate candidates that haven’t attended a very short list of topic schools. In fact, going to a non-top 10 business school could actually hurt your chances vs. not going at all.”
Alternatives to increase your compensation
Considering the two years of lost experience and the cost of the degree, obtaining a MBA may not be the best move for your private equity career. If you’re simply looking for a higher paycheck, an MBA may not be the answer. Instead of turning to an MBA to advance your salary, our research found that compensation was influenced more by fund size, firm type, experience, and job title, among other factors.
Feb 18, 2012 | Industry
Carried interest, often known simply as ‘carry’, is an incentive provided to private equity fund managers to ensure their interests are aligned with investors. Rewarded to fund managers on top of their management fees, carry is a percentage of the fund’s profits and plays a big role in private equity compensation.
On average, carry is about 20% of the fund’s profits. However, this can range up to as high as 50%, or way down to below 10% of the fund’s profits. With increasing competition from different firms to attract investor capita, carry is often decreasing as fund managers try to outdo each other to win investment.
While this general concept applies across the industry, it’s important to note that there are many different carry structures with varying complexity. More established firms with a good investment history have more favorable carry structures, while newer firms are often at a disadvantage.
Why is carry received by fund managers?
With the amount of work required to turn an investment into profit, it’s believed that carry is justified on top of management fees. Before investing, due diligence requires significant analysis, among other work. Once capital is invested in a company, fund managers must get involved in business operations and strategy, restructuring, and business development to make the most of their fund’s investment and maximize profitability.
How often is carry rewarded?
To encourage long-term profitability, investors prefer multi-year vesting periods. Typically, carry will be vested for 3-4 years, ranging anywhere from 1 year to 6 years in rare cases.
Who receives a share of carry?
Private equity firms often share carry between current teams, and old or existing owners. Retired partners also receive carry after their equity is bought or when they retire.
Among the current team, who receives a share of carry comes down to the years of experience of an employee. Only 14% of private equity professionals with less than 2 years experience will receive carry, compared to 70% of those with 20+ years experience. The majority of private equity professionals with at least six years of work experience have some level of carry as part of their compensation package, making it essential to fully understand how carried interest can boost your remuneration.
Carried interest is an important concept in the private equity industry, with plenty of potential to increase your compensation and rewards. While carry varies between funds and firms, it’s essential to understand how it works to ensure your compensation is fair.
Dec 16, 2011 | Industry
Both Base Salaries and Bonuses are Up Again this Year Despite Some Job Security Concerns
SAN DIEGO, CA, December 19, 2011 — A report released today by PrivateEquityCompensation.com indicates the private equity and venture capital markets are continuing to enjoy increases in compensation and that the trend that will extend into 2012.
For the second year in a row, private equity professionals reported a solid increase in total earnings over the previous year, with the average cash earnings coming in at $248,000 USD, coming in the form of both increased base salaries and bonuses. The average expected increase was 6 percent and, again this year, more than 40 percent of professionals expected double digit increases over last year.
2011 brought with it plenty of fund raising activity and, it was clear from the report, the success of that activity was all over the board. The smaller funds continue to do most of the work, yet the larger funds get most of the money. This inequity is partially responsible for over half of respondents indicating they have some job security concerns.
Despite smaller assets under management, employees at smaller firms reported higher earnings and some guaranteed bonuses. “We believe the demand for private equity talent in the larger firms is forcing the smaller firms to keep pace, in order not to lose their most talented players,” says David Kochanek, publisher of PrivateEquityCompensation.com.
Different from past reports, the venture capital firms led the charge in base compensation increases; the downside this year was that their average bonus decreased. “That’s not totally unexpected as last year we reported that VC firms were paying the highest bonus percentages of all the firm types,” said Kochanek.
Last year, 85 percent of those reporting said their fund’s performance was in the black. This year’s expectations are a bit tempered, as 73 percent are projecting a positive year. Unlike last year’s Private Equity Compensation Report, this year there was a disconnect between fund performance and bonuses. If a fund was even or down, good sized bonuses are still expected and some even guaranteed.
Will this positive trend continue? “We believe 2012 will bring with it increased base salaries and healthy bonuses once again,” said Kochanek. “Expect continued demand for investment professionals and talented operationally-focused players to work in portfolio companies – even if the economy continues to show lackluster improvements.”
About The Report
The 2012 Private Equity Compensation Report is based on an industry survey conducted in October and November 2011. Data was collected directly from hundreds of private equity and venture capital partners and employees. The full report can be found at http://www.privateequitycompensation.com.
The Report has grown to be the most comprehensive benchmark for private equity and venture capital compensation practices. Some of the participating firms over the years include: 3i, Actis, American Capital, AXA Private Equity, Babson Capital Management, Bain Capital, Barclays Capital, BlackRock, Carlyle, Century Capital Management, Clairvest, Comcast Ventures, CPP Investment Board, Deutsche Bank, DuPont Capital Management, EDC Equity, EdgeStone Capital Partners, Global Environment Fund, Highland Capital Partners, Hilco Consumer Capital, Kaiser Permanente Ventures, Kayne Anderson, Mission Ventures, Mohr Davidow Ventures, North Atlantic Capital, Qualcomm, RBS, Safeguard Scientifics, SV Life Sciences, Siemens Venture Capital, Time Warner Investments, and Wellington Partners.
About PrivateEquityCompensation.com
PrivateEquityCompensation.com is a division of Job Search Digest, a web-based career service catering to professionals in private equity, venture capital, hedge fund and investment banking since 2002. Annually, the firm collects compensation data directly from hundreds of private equity and venture capital partners and employees from firms both large and small. The firm also publishes a blog on private equity and VC careers which can be found at www.InsideTheFirm.com
