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.
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.
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.
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.
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.