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- Sharing the Pie: Long-term Incentive Plans at Family Offices
Sharing the Pie: Long-term Incentive Plans at Family Offices
When all is said and done, everyone wants to build wealth 💵
Family offices want to build wealth
Family office employees want to build wealth
The good news is that these intentions can go hand in hand
There are two fundamental trends in the world of family offices
1) An explosion in the number of family offices
2) A shift in priorities from capital preservation toward growth
These trends bring into focus important questions:
> How to attract the best talent
> And how to retain that talent
🚀 The number of family offices in the world has tripled since 2019
🚀 According to a new report from Preqin, the number of family offices worldwide topped 4,500 last year, with a concentration in North America
🚀 Experts say family offices now manage $6 trillion or more, and… twitter.com/i/web/status/1…
— Mr Family Office (@MrFamilyOffice)
10:12 AM • Mar 10, 2024
🛠️ One of the key tools being used by family offices are Long-term employee incentive plans (LTIPs)
“A Long Term Incentive Plan (LTIP) is an executive compensation structure that rewards employees for reaching a milestone of employment. These plans usually have other conditions and metrics attached.”
LTIPs are used to align the interests of the family office with those of its employees
The goals of LTIPS are clear:
build loyalty
drive performance
grow the family wealth
grow the employees' wealth
LTIPs range from equity stakes and profit sharing to tailored bonus schemes
LTIPs help family offices make employees key stakeholders in their future
Deal breaker
For C-level executives in family offices, LTIPs should be a deal-breaker. LTIPs help you take skin in the game
It usually follows: with ownership comes wealth
LTIPs should be a win-win for the family office and employees. They are set up to make sure employees are getting a real stake in the success they are helping to create
This could mean getting a share of the profits, a slice of the investment pie, or bonuses tied to investment performance. It's about tying the rewards directly to the goals and success of the family office
LTIPs in Action
Family offices vary considerably, and so do their incentive schemes
It’s important to note that most family offices do not offer LTIPs
A recent survey found that just 34% of US family offices offered LTIPs (and the US leads the world)
(Agreus/KPMG 2023 Family Office Survey)
But where LTIPs are used, family offices can be very creative in tailoring them to fit their goals
The key themes in LTIPs:
A Cut of the Profits
Equity Upside
Investment Returns
Performance Bonuses
LTIPs in action 🎬
Carried Interest
Carried interest is the most common LTIP in US family offices. It is a form of performance-based compensation given to managers or employees who oversee the family's investments. It represents a percentage of the profits generated from investments. Carried interest is awarded if investments perform above a certain threshold
This arrangement incentivizes employees to maximize investment returns, aligning their interests with the family's goal of wealth growth, without requiring them to contribute their own capital to the investments
Carried interest serves as a performance incentive for the management team at family offices, aligning their interests with the success of the investments
Carried interest is common in private equity and venture capital investments (where significant gains can be realized upon successful exits of portfolio companies) but it is growing in importance in family offices
Matched Investment
Matched investment programs are designed to encourage employees to invest their own money in projects or funds managed by the family office, with the promise that their investment will be matched by the office up to a certain limit
This creates a powerful incentive for employees to seek out and support high-potential investments, knowing that their personal financial commitment will be boosted by the family office
These programs deepen the alignment of interests between the family office and its employees, ensuring that both parties are invested in the success of the ventures. It also encourages a culture of ownership and entrepreneurial thinking within the family office
Co-Investing Opportunities
Co-investing opportunities offer a way for employees of family offices to directly participate in specific investments alongside the family's capital. This approach helps build a deeper alignment of interests, as both the family and its employees have tangible stakes in the success of the investments
Co-investing can also enable employees to benefit from the family office's access to high-quality deals and investment expertise, often at lower entry costs and with favorable terms. It's an effective way to engage and reward employees, allowing them to grow their personal investment portfolios while contributing to the collective success of the family's investments
Family offices and employees should carefully consider and plan for what happens to co-investments if the employee leaves the family office
Stock Options
By granting stock options, family offices give their employees the right to purchase shares of the investment vehicle or (more often) the underlying portfolio companies at a set price after a certain period or upon meeting specific criteria
This approach not only ties the employees' financial fortunes to the success of the family's investments but also serves as a retention tool by incentivizing employees to remain with the office to capitalize on the potential appreciation of the options. As the value of the investments increases, so does the value of the stock options
Employee Loans
Some family offices offer forgivable loans to provide immediate financial benefits to key employees with the potential for these loans to be forgiven over time, based on continued employment or the achievement of specific performance benchmarks
This mechanism can effectively tie an employee's financial interest to the long-term success of the family office or its specific investments. Forgivable loans are particularly useful for offering immediate cash incentives without immediate equity relinquishment, providing a strong incentive for employees to remain with the family office and contribute to its success over the long term
Family offices may also offer employees favorable loans that can be paid off with bonuses in later years
Phantom Shares
Phantom shares, also known as shadow stock or synthetic equity, are a form of long-term incentive that provides employees with the benefits of stock ownership without actual shares being transferred. Instead, employees receive a unit or credit that mirrors the performance of the company’s stock or the value of the company, and they can be cashed out at a future date, typically tied to certain conditions such as tenure or performance goals
The initial agreement sets the terms, such as the percentage of value or number of units/shares the phantom equity represents. This could also impact the ratio of ownership
Phantom shares are particularly interesting for family offices who may not want to dilute the family equity in the primary investment vehicle but do want to closely align employee incentives with the underlying performance of the family office
Practical examples
The Agreus Group has listed some practical examples of LTIPs in family offices:
➡️ Percentage of Net Profits based on project execution
➡️ 1% of the upside on private equity business
➡️ % of investment, each investment with an appropriate %, generally between 0.3 and 1%
➡️ % of performance return, once 6% cash flow return is made
➡️ 10% of performance
➡️ $14k per 1% outperformance versus a composite benchmark for the entire portfolio
➡️ % of the value created
➡️ 10% profits earned on portfolio ... based on excess return over benchmark
➡️ % of performance over the hurdle of 6%
A long way to go
LTIPs are changing the game for employees in family offices
When LTIPs are used, employees are not just working for someone else's wealth; they are building their own wealth and equity through the success they help create
LTIPs mean that employees are not just investing time and skills, they are investing in their future too
So, whether you're already in the family office world or thinking about jumping in, take a closer look at LTIPs. They could be your path to not just growing wealth but owning a piece of it
With a minority of global family offices offering LTIPs, there is a mismatch in the incentive schemes offered by family offices and their generally stated aim to focus on long-term wealth accumulation and protection
I share numerous co-investments with the family office I represent. It undoubtedly means I focus on the long-term, it has bound the family and me together
It means I am highly invested in our investments!
From a family office perspective, as long as you embed LTIPs with clear and correlating key performance indicators, you can use this reward structure to engage your staff, align your interests and incentivize them to stay within your Family Office for as long as they can
LTIPs help ensure that everyone is striving to reach the same goal
And this supports the very survival of Family Offices
𝕏 highlights
Philanthropy in action:
Philanthropy by the ultra-wealthy
A recent report dives into UHNW giving
🔹The ultra wealthy in North America were the source of almost half of all global UHNW donations in 2022, with donations of $84.5bn
🔹Europe’s ultra wealthy class has accounted for a rising share of… twitter.com/i/web/status/1…
— Mr Family Office (@MrFamilyOffice)
1:28 PM • Mar 25, 2024
Luxury doesn't always scale with wealth
What luxuries don’t scale with wealth
One example: Prince Andrew wears a 18 carat gold Apple Watch worth $15,000
— Mr Family Office (@MrFamilyOffice)
2:42 PM • Mar 24, 2024
This one caused a stir. A timely reminder that X is not always the best place for nuance or positivity
My daughter went down a social media rabbit hole that changed her life forever
As Florida bans social media for under 14s, I feel I should share her story
At the age of 11/12, we gave our daughter her first phone. Before long, she had discovered TikTok
Somehow she ended up in… twitter.com/i/web/status/1…
— Mr Family Office (@MrFamilyOffice)
1:12 PM • Mar 26, 2024
Do you work with management consultants?
Your honest view of Management Consultants?
Capgemini, McKinsey, Bain, Accenture, BCG
As a client have you had major wins from consultants?
What about Ls?It's a fairly familiar scene: the fresh 20-something graduate consultant or their polished MBA manager trying to advise… twitter.com/i/web/status/1…
— Mr Family Office (@MrFamilyOffice)
4:36 PM • Mar 24, 2024
📚 what to read
My favorite book of 2024 so far. Think British Liar’s Poker.. I tweeted about it:
Gary Stevenson was a math genius and he cashed in
He grew up in violent poverty-stricken East London, a far cry from the gleaming City of London towers visible on the horizon
But Stevenson’s mathematical skills won him a place at the London School of Economics and then on… twitter.com/i/web/status/1…
— Mr Family Office (@MrFamilyOffice)
5:12 PM • Mar 27, 2024
📺 what to watch
Money Can Buy Happiness by Michael Norton
TEDxCambridge delves into how spending on others can increase your happiness
📰 family offices news roundup
And finally…
A request: I would like to include some more family office profiles
These can be suitably anonymized or not - your call
If you are interested, let me know and I will send a short questionnaire
With that, it’s off for some Easter holiday planning for me 🥚🐰🐣🐥🍫
Have a good one!
Until next time, see you on 𝕏
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