Family offices use structured pay to keep executives for the long term

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Family offices are ramping up the war for talent, creating new incentive plans for top executives that are boosting pay, according to a new report.

A majority of family offices are now using long-term incentive compensation plans, which increase total pay based on performance and investment returns, according to a report from Morgan Stanley Private Wealth Management and Botoff Consulting. Nearly two-thirds of investment-focused family offices are using long-term incentive compensation, according to the report.

While family offices — the private investment firms of the ultra wealthy — have often given special performance bonuses to executives, the awards are becoming more structured and clear.

“Over time, we are seeing an increased formalization of compensation plans,” said Valerie Wong Fountain, managing director and head of family office resources platform and partner management at Morgan Stanley. “If you go back a number of years, you may have seen more handshake agreements. Now it’s more structured and measured against performance.”

At investment-focused family offices — which are more like in-house financial firms, with more specialized teams — the median total compensation for CEOs is $825,000 a year, according to the report. Larger investment-focused family offices, with over $1 billion in assets, are paying a median of over $1.2 million. Soaring pay at the very top of investment-focused firms has pushed average pay for $1 billion-plus CEOs to over $3 million a year, according to the report.

Chief investment officers, or CIOs, are also benefiting. Median pay for investment-focused CIOs is now $900,000, with the average at $1.8 million.

The incentive plans are also changing. Co-investments are becoming especially popular, allowing executives to invest alongside the family in deals. Since wealthy families often get special access to other companies and deals, the opportunity to invest alongside the family is an added bonus.

The other common incentive plans include carried interest, where the executive gets a share of the investment gains beyond a benchmark, as well as phantom equity, profit sharing and deferred incentive plans.