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.
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.
One of the most important factors in retaining top talent in the financial industry is employee satisfaction with their compensation arrangements. Despite this being such a critical leading indicator of potential turnover issues, many firms in the industry do not actively survey their employees on how happy they are with their pay. This can be a critical mistake for firms, especially as the demand for top talent increases as the private equity and venture capital industries grow.
Perhaps not surprisingly, we’ve found that overall pay satisfaction is highly correlated with overall job market conditions within the industry. During times of struggle and declining employment, pay satisfaction tends to increase. However, once the economy heats up and jobs become more numerous, it seems as though employees grow increasingly interested in how much their peers are earning across the street.
2013 Survey Showed an Upward Trend in Satisfaction
That said, despite increased hiring intentions and a relatively robust industry, we’ve seen a markedly upward trend in satisfaction with compensation. According to our 2013 survey, 56 percent of respondents reported they were happy with their pay packages, which is up from 41 percent and 36 percent in the last two years respectively. As the over trends in hiring intentions and employment seem positive, we suspect that the considerable growth in average industry compensation this year is likely a driving factor behind the satisfaction numbers we’ve recorded. However, if our historical understanding of compensation satisfaction holds however, we would expect to see this number begin to decline as hiring intentions begin to shift into real competition for top industry talent.
It is also important to note that satisfaction with pay can fluctuate wildly throughout the year, perhaps with employees feeling underpaid at peak workload periods and adequately compensated during less intense periods. Even a bad day in the office can impact whether someone perceives themselves as being fairly paid.
Overall, the private equity and venture capital industries do reward the hard work of their employees with exceptional compensation. In a broader United States or global employment context, the industry is amongst the most highly compensated in the world. However, that doesn’t mean that some individuals can feel slighted, with much of the dissatisfaction present in the industry is simply competitive tensions and employees wondering if they could make more at another firm. Managing this dissatisfaction is critical to firms that are looking to retain their top talent as competition in the industry heats up.
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.