Why family office remuneration matters

Setting up and growing a family office often requires the right talent to undertake a range of management and administrative tasks. The challenge is governance; a family office will usually have a small team with each team member needing to undertake a range of work, so careful thought is needed to protect the family’s future objectives while attracting, motivating and retaining a team, preferably for the long term as they embed themselves into the family’s lives and strategy for the wealth.

Attracting and retaining talent in a family office

Finding the right staff, especially at a senior level, with the right skillset for, say, running the family office or taking responsibility for the investment strategy, can be difficult for family offices. They often compete for talent with a range of businesses, including investment banks, private equity houses, hedge funds, professional services firms, etc. Those employers usually have established HR functions, clear remuneration frameworks, promotion routes and institutional incentive plans. A family office can offer something different – greater variety, proximity to decision makers and a more personal environment, but it may not have the same infrastructure or obvious career path.

To create the right kind of offer to attract and retain talent, family offices need to consider some practical questions:

• Who owns the reward strategy?
• How formal should it be?
• How does the family balance flexibility with fairness and control?

These questions matter because remuneration is not only about market pay. It also shapes behaviour, expectations and the relationship between the family and the people working for it.

Some elements of the remuneration package are relatively easy to benchmark and replicate, including salary, pension, healthcare, car allowance and annual bonus. The harder question is whether those elements are enough to recruit and retain the people the family office needs. Bonuses should have clear performance measures, appropriate discretion and suitable ‘bad leaver’ protections.

Long-term incentive plans for family offices

The most difficult area to get right is long-term incentive plans (LTIPs). In more traditional investment employment arrangements, share awards, LTIPs, restricted stock, options or carried-interest style arrangements are commonly used to incentivise employees. They create a way for employees to share in long-term value creation and solidify the link between performance and reward. A family office may want to achieve the same outcome, but often without giving employees a permanent economic interest in family assets or creating complexity that is difficult to unwind.

Tax advantaged share option plans are sometimes available. However, the limits, formalities and HMRC compliance requirements may not fit naturally with a private family office where external ownership of value is often to be avoided. Awarding shares or growth shares can create wider commercial and personal implications, with family offices needing to consider questions like:

• What share rights does the employee have?
• How is value measured?
• What happens if they leave?

For that reason, many solutions are synthetic rather than equity based. Phantom share rights or a cash LTIP can deliver a reward linked to the value of a fund, portfolio, operating business or family office vehicle, without giving the employee direct ownership. Key to making these arrangements successful is careful design. The performance conditions, measurement dates, leaver rules, discretion and approval process should all be clear at the outset. Without that discipline, an incentive plan can become a source of disagreement rather than alignment.

Co-investment can also be attractive, particularly for senior investment professionals. It gives the employee ‘skin in the game’ and can create a strong shared interest in long-term performance. However, it too requires careful thought. The family needs to consider funding, conflicts of interest, access to information, exit arrangements and whether the employee is investing on the same terms as the family. There will also be tax, employment related securities, PAYE, national insurance and financial services and securities law points to work through. Those issues should be addressed early, not after the arrangement has created expectations.

Choosing the right remuneration strategy

Ultimately, there is no one-size-fits-all solution to creating the right conditions to attract and incentivise talent for a family office. The right approach depends on the family’s objectives, the size and maturity of the office, the roles being recruited and how much control the family wants to retain. As well as being tax efficient and market competitive, the most successful arrangements are clear, intentional and consistent with the culture of the family office. That is what turns remuneration from a cost into a governance tool.

For advice on how to best structure your family office team, contact Fiona Bell or George Carter.

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