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.
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.
