Professional staff are critical to family offices, working alongside families in the management of their wealth. How to pay these employees fairly is a recurring question, and compensating the team’s chief investment officer (CIO), who decides and implements investment strategy, can be especially tricky.
Structures for determining CIO salaries, yearly bonuses and deferred payments range considerably, particularly given the change in portfolios from the classic 60/40 mix to alternative investments that bring nebulous returns spread over time.
The right package can be more than a tool to attract and retain top talent. It often also marks a move away from informal and discretionary CIO compensation to more intentional structures that help to incentivize commitment and build trust.
“There’s tremendous variability,” says Andrew Stockton, managing partner at Gilmore Partners, an executive-search firm based in Toronto with family office clients around the world. The assets under management (AUM) in a family office are the largest factor affecting the size and scale of CIO compensation from a base-salary perspective, he says.
But with bonuses based on key performance indicators and the addition of deferred compensation, “there’s a vast pool of compensation ranges out there.”
When it comes to reflecting alternative investments in CIO compensation, Stockton notes that much depends on how alts are defined and the age and stage of a family office and its principals. He says long-term incentive plans (LTIPs) and other profit-sharing measures that recognize, motivate and reward employees for fulfilling long-term goals and objectives are increasingly part of the mix.
Paul Westall, co-founder of Agreus Group, which has offices in New York, London, Singapore and Dubai and does recruitment and consulting for family offices globally, says LTIPs are more common in the investment world, less so in family offices. But family offices are increasingly hiring from other parts of the financial industry, raising the need for clarity and long-term upside in the design of their reward architecture.
“In the early days, things were based very much on trust and handshakes,” Westall comments, noting that CEOs and heads of family offices often were among long-term staff that had moved over from the family business. “Now that we are seeing more institutionalized-type family offices, the structures are becoming more professional.”
Compensation survey out today
He says the Global Family Office Compensation Benchmark Report, a global survey that Agreus and KPMG Private Enterprise collaborate on every two years, shows that LTIPs are offered at 33 per cent of family offices in the Americas region, which includes Canada.
The report, which was published today, Sept. 30, found an increase in family offices investing in alternatives, which Westall says has prompted new ways of paying CIOs and investment staff. “If you’re doing private-equity investing, you need to attract people who have worked in that world, and the way they’re compensated is a bit more entrepreneurial.”
LTIPs can include carried interest arrangements, he notes, where an investment in a company comes with growth targets, and if they are exceeded, a percentage of the upside is shared among the team. A target can also be set for the entire fund performance, typically over three to five years, “and if it’s achieved, you get a percentage paid to you as a bonus, usually a multiple of your salary.”
Westall says 54 per cent of family offices in the Americas with LTIPs offer co-investment opportunities, according to the report. These allow CIOs to invest alongside the family, which can be done through a loan or as part of their pay or bonus.
“It’s aligning their interest with the family and also giving access to investment opportunities that wouldn’t normally be accessible,” he explains.
Why use variable compensation systems in family offices? They can shape behaviour, deepen relationships with staff, contribute to a shared purpose and encourage loyalty, says Ken Hugessen, founder and partner of Hugessen Consulting, a Canadian firm that provides advisory services regarding executive compensation, board effectiveness and other governance structures.
Family offices can find themselves in competition with “the big funds, the banks, everybody else who’s investing money” when it comes to hiring CIOs, he says.
“Fairness typically is defined as market competitiveness—that you’re doing as much as what any other employer of that kind of talent would offer,” Hugessen explains, noting that LTIPs are becoming an essential part of that. “Competing for people who are capable enough to get those sorts of jobs elsewhere, you either provide it or you risk losing them.”
How does compensation drive behaviour?
Hugessen says that “it happens in reverse. When I talk to managers, I don’t hear them say, ‘I’m going to do this, that or the other thing, because that’ll get me more pay.’ It’s more a retrospective, ‘If I have done this, I expect I will be well paid for it.’ And there’s a subtle difference there.”
CIOs play varying roles
One question arising among clients is how family offices should compensate family members who take on senior positions such as the CIO, he adds. “I don’t see that I should be paid any more or less than a professional manager because I come from the family.”
Kevin Zhu, a manager at Hugessen Consulting, points out that CIOs can play different roles in family offices.
“There might be a dedicated CIO for larger organizations, and that’s where you get scale and have a need for oversight across all the different platforms. But for smaller family offices, that might be a responsibility that sits with the CEO or president.”
In either situation, when it comes to pay, “it’s really thinking about compensation philosophy and getting alignment,” Zhu says. “At the end of the day, you’re going to need to pay somebody for that role, and you want to align compensation with performance.”
One challenge for family offices providing LTIPs is managing them, Zhu says.
“You need somebody to understand the program and administer it, and that comes with its own burden,” he explains. “We’re seeing a growing number of family offices turning their attention to this, but also trying to balance the complexity that comes with it.”
‘What are other family offices doing?’
Westall says CIO compensation “is a growing issue because of the opaqueness of family offices. They’re not public entities, the information is not out there.” Banks and investment firms are highly benchmarked, he notes, “but family offices often don’t know how to pay their staff.”
The topic is “very much a black box,” Stockton says, with little sharing between family offices—albeit much curiosity among them.
“It is certainly one of the questions that comes up from all my family office clients: ‘What are others doing?’” He signs confidentiality agreements, so he can’t mention specifics, “but I can talk to them about the general overall market, especially as it relates to their city, state, country or region, because that matters.”
A family office in New York, San Francisco or Miami will have to compensate at a higher level than one in Chicago or Atlanta, he says. “A Canadian example I often see is that a Toronto or Vancouver family office will have to compensate higher than a Calgary or Montreal family office.” Internationally, he says, family offices in London, Monaco, Zurich, Tokyo and Hong Kong need to compensate at a higher level than in Paris, Berlin, Madrid, Singapore and Sydney.
Are family offices ready for these types of compensation arrangements?
“Some are, some aren’t,” says Stockton, noting that major issues are a family office’s goals and outlook, be it wealth preservation or creation. “Is a new generation going to be entering into the family office in a more substantial way, and be more comfortable with alternative investments, and okay with larger payouts to a CIO based upon larger gains?”
CIOs might also face philanthropic mandates, “which of course complicates things further, because larger gains mean something different,” he notes. “These are scenarios I have figured out with my family-office clients, so it is possible. It just adds complexity.”
Stockton points out that the total compensation for a CIO can be significant, “and there’s certain families out there who could say, ‘Wow, that’s a hefty pay package for that individual.’”
He cautions that “it’s really about the total return, and if that person is bringing value back to the family office, they should be compensated accordingly.”
Mary Gooderham is a writer, editor and communication advisor based in Ottawa. She leads Cohen Gooderham Communications and has worked as a journalist for more than 40 years at The Globe and Mail, as a recording officer at the International Monetary Fund and as a custom content creator for online and print media. She’s been a contributing writer at Canadian Family Offices for four years, focusing on investment strategy, trusts, philanthropy, women in finance and estate planning.
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