Bonuses Driven by Multiple Factors

Feb 4, 2014 | Bonuses, private equity compensation

The annual bonus is a large part of compensation in the financial industry and this holds true in both private equity and venture capital firms. Depending on a number of factors, bonuses can range from a most welcome “extra paycheck” at the end of the year to a substantial majority of a professional’s total compensation. Our 2013 Private Equity and Venture Capital Compensation Report identified several factors that influence bonuses in the industry, from fund performance to firm size and job titles. Considering all of these elements is critical when attempting to determine whether a bonus is on market or not.

One of the obvious factors that drive bonus levels in the industry is fund performance. Simply put, a firm experiencing greater success is likely to reward its employees most handsomely. This was certainly one of the leading factors in the differences between reported bonus levels. Top performing funds, earning in excess of 25 percent for their investors, rewarded employees with $151 thousand in incentives in 2012. That compares to only $11,000 being awarded to employees in firms that lost over 10 percent of their value. With a clear trend correlated with performance, it’s safe to assume that the majority of a private equity professional’s bonus will be driven by the returns the fund provides to its investors.2013-private-equity-bonus-guarantees

Another factor that weighs on the size of one’s bonus is firm size. While performance can also be somewhat correlated with firm size in some cases, it still holds that both the number of employees and the size of the firm or fund weighs heavily in how much bonus compensation an employee will receive. In general, firms that manage more assets tend to offer higher bonuses despite base compensation being largely the same between firms. On average, an employee at a firm managing $1 billion or more in assets earned a bonus of $250 thousand in 2012, while at a firm with under $200 million in assets an employee would be likely to see $100 thousand in incentive pay.

Somewhat surprising, however, is the impact of the number of firm employees on expected bonus size. The highest bonuses were seen among firms with less than 5 employees. This likely reflects the concentration of senior professionals in smaller firms and a higher reliance on results in order to sustain the very existence of the firm.

The rewarding of senior employees through higher bonus payouts was seen across the industry however, not just in small firms. For example, the average bonus of a Director was around between $100 and $130 thousand per year across all firm sizes, while an associate saw between $24 and $66 thousand. The largest bonus payouts were found in those with Partner and Managing Partner titles, with some big firm leaders earning up to $1.5 million in incentive pay in 2012. Across job titles, a clear trend is evident in that more senior employees will find a larger portion of their pay coming from incentives. This trend likely ties in to their greater influence on firm profits.

With this considered, it’s important to keep in mind all of these factors when evaluating incentive compensation. Bonuses can vary heavily based on these factors. However, performance is always the key driving factor in incentive payouts, whether that’s the performance of the fund or an individual’s own contribution. Successful results are always the best way to ensure a higher bonus payment at the end of the year.

 

Private Equity and Venture Capital Fund Performance Drive Bonuses

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.