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Cheques & Balances

With opinion divided on the extent of bonuses – and the merits of long-term retention – it is easy to see why there is nothing approaching a standard model for family office remuneration.

One of the obvious challenges in formulating a compensation package for senior family office staff is that candidates from different backgrounds will have different financial priorities. For example, a survey of hedge fund portfolio managers conducted last year by Greg Coules and Adrienne Donald of boutique executive search firm Hunter Associates, found that the most important issue for these managers when considering a career in the family office sector was long-term compensation.

Then there is the disparity between single and multifamily offices. Christian Sulger Buel, managing director of wealth management executive search firm Sulger Buel says a clear distinction should be drawn between compensation expectations for those going into single family offices and the packages on offer from multifamily offices.

The precise level of compensation varies from family to family, he continues, with salaries ranging from £150,000 to £1 million depending on the role. While he was reluctant to commit to an exact figure, Sulger Buel said that as a rule of thumb it would be similar to that paid to senior management in the family company.

The main difference between the single and multifamily office compensation package lies in the bonus, he explains. "Single family offices pay a good base salary but are less likely to pay large bonuses. Commercial multi family offices are more akin to private banks and therefore have different objectives and bonus culture. In this environment, compensation is generally comparable to that available from private banks. However, it would be hard to put a specific percentage on the differential between the two."

Bonuses are playing an increasingly critical role in the recruitment of top investment talent according to Coules, who leads the family office practice at Hunter Associates. "For CEOs of family offices, bonuses are less of a factor and compensation tends to be a fixed salary with a smaller percentage of pay being in the form of a discretionary bonus. But for CIOs specifically, bonuses tied to outperformance according to predetermined benchmarks are common."

While those surveyed by Coules and Donald saw advantages in the greater stability and "downside protection" offered by the family office, they were most concerned by the absence of "meaningful performance bonuses". Louise Adams, managing director of single family office Anthos London, argues that because her senior staff are primarily lawyers and accountants, pay levels are benchmarked against accountancy and law firms. The Anthos family office was separated from the family business some years ago, so there is no direct correlation between senior staff salaries in the family office and those paid to senior managers in the family business.

To be competitive, it makes sense to analyse what others such as private banks or investment managers are offering, but that doesn't necessarily mean that family offices have to offer similar compensation structures. That is the view of European single family office director Daniel Goldstein, who says potential earnings depend on the specifics of the position.

"If the person manages money in-house, they might merit a performance based pay system that would be equivalent to (or even higher than) what someone in a private bank would earn. If they are making direct investments in businesses then that might call for something higher still. If you are trying to fill a very long-term position that requires divulging and maintaining very confidential information then you will need to offer a very competitive salary," says Goldstein.

Share options might also be a factor when recruiting from the private banking sector, but for most family offices compensation consists of a combination of base salary and bonus, explains Adams. "We offer a market salary and a discretionary bonus where everyone is given a grade in an assessing process and the bonus reflects their grade. There was previously a fixed bonus structure, which was scraped as it was no longer relevant to modern remuneration practices."

Discretionary bonuses are much more common in the family office sector than fixed bonuses, although some offices don't pay them at all, continues Adams. "Law firms and accountancy practices are starting to pay bonuses, but in terms of recruiting it is more of an issue for those coming from the private banking or other corporate sectors."

Goldstein points out that if someone is tasked with managing a liquid portfolio and has certain benchmarks, the family office probably needs to incentivise with bonuses. "But, you must ensure that the bonus is structured to not incentivise short-term, high risk behaviour," he warns.

One of the functions of outperformance measures is to encourage long-term retention, adds Coules, who says a lot of emphasis is placed on this within family office pay structures. Outperformance measures are typically assessed over multi-year periods, typically rolling three years.

All family office environments demand commitment, but even where pay rates have been increased to attract and retain staff there is still a significant level of what Sulger Buel refers to as "staff rotation". In his opinion, the most effective incentive is to create a situation where staff are shareholders and have a tangible stake in the success of the business.

According to Goldstein, long-term retention is a constantly evolving process. Family offices often change, starting out with one direction and changing as opportunities are found and as wealth passes in control from one generation to another. "This can be both a positive and a negative development. Offering a competitive salary is important, but aligning interest and having good communication for when the focus changes is as important. You can't always do that with a fixed job description as family office roles tend to be much more organic and evolve."
In any case, the managing director of Anthos London is not convinced that very long-term retention is necessarily the best approach for either the individual or the business. "In a family office, as in most twenty first century businesses, a decade is probably a decent stint. However, during that time people may move up the ladder or, in our case for example, staff in London can apply for positions in another Anthos office."

Sulger Buel reckons the attitude to bonuses in multifamily offices has not been adversely affected by the controversy surrounding sums paid to merchant bankers. "They simply don't compare in terms of scale and in any case bonuses in the multifamily office space, which tend to be linked to both personal performance and the performance of the business, fell in 2008 and 2009 in line with a reduction in assets under management."

Soft issues are described as a key element of family office compensation packages by Coules, with reporting lines, involvement of other family members, culture and lifestyle among the factors that top talent will consider before taking up a new position.

Soft or non-financial issues are not usually raised by candidates at the interview stage, says Adams, but more so after they have joined the office as they see some of their colleagues working flexible hours. "Many of our staff have children and work part time - including lawyers. This is not a problem provided they do the job effectively, although much of the work demands they are physically in the office." But Sulger Buel warns that anyone who thinks they will work fewer hours in a family office than a private bank are barking up the wrong tree. "The major difference is scale," he says. "It might be a different environment but the workload is still significant."

Given that his company is mandated by clients rather than candidates, he is not in a position to defend executive search firms from the charge that they are creating unrealistic expectations among potential recruits. However, he did state that while there are enough suitable candidates available to fill single family office roles, the dynamic is rather different for multifamily offices and private banks.

"In this environment, everyone is looking for assets gatherers and they are still still a scarce resource, so the best people are in high demand. Most recruits for single family offices are coming from investment banking rather than private banking, whereas for multifamily offices they are more likely to have a private banking background." Coules suggests that there are very few executive search firms with a deep understanding of what he describes as, "the very opaque world of family offices in general and the compensation structures within family offices specifically." Coules is also reluctant to comment on any expectations that are being created by the broader search firm community.

But he is prepared to state that the best people are not readily available. "As a general rule, truly top calibre candidates are in existing seats, which is why family offices engage search professional to locate the best talent," he concludes.

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