From the category archives:

Compensation

Why do some employees opt for the small, startup investing firm, while others arrive at the larger, more established financial firms? In an interesting review, private equity data provider Pitchbook recently provided us with some survey evidence on the reasons. Here’s a look.

Cash Compensation by Firm Size

The first look is cash compensation by firm size. In dark blue below is cash compensation at firms with assets under management (AUM) of between $1 to $2 billion. At these firms, the median cash compensation is $467,500. Not bad by almost any measure, but compared to large firms, the picture is not as bright.

In light blue are managing directors and partners of medium-sized investment firms. The median cash compensation at these firms reaches $650,000, a healthy jump from the smaller firms.

Moving down the figure, in yellow are the larger firms with AUM of $6 billion or more. The cash compensation of these firms is large, reaching $803,000.

When it comes to being a managing director or partner at an investment firm, it’s survival of the biggest.

Source: Pitchbook

Median Share of Carried Interest

Shifting attention to carried interest, the following figure has that view. Interestingly, the medium-sized investment firms are much more favorable to their managing directors and partners. At medium-sized companies, the median share of carried interest reaches 5.5%, higher than the 5% earned at the smaller investment firms and much higher than the share at larger investment firms (1.2%). Hmm.

Source: Pitchbook

What About Vesting Times?

With the following background, how do vesting times compare among the three investment firms? The following has the results of the Thelander-Pitchbook Compensation Survey.

Overall, for smaller firms, the most popular vesting time is seven to eight years, capturing 32.3% of survey respondents, followed by nine years or more at 25.8% of survey respondents, and 22.6% for a vesting time of five to six years.

Interestingly, for medium-sized firms, the most popular vesting time is five to six years (34%), followed by seven to eight years (21%) and three to four years (20%). Apparently, you get paid sooner working at a medium-sized investment firm compared to a smaller investment firm.

Lastly, looking at the larger investment firms, the most popular response was 40% for a vesting time of three to four years, followed by 32% for a vesting time of five to six years and 17% for a vesting time of seven to eight years.

Overall, managing directors and partners tend to get a shorter vesting time when they work for larger investment firms. Guess it pays to go big.

Source: Pitchbook

Summing Up

Overall, large cash salaries and shorter vesting times explain a lot of the shift in talent from smaller investment firms to those with $1 billion or more in assets under management. There’s no sign yet of this trend reversing.

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This past week Pitchbook released a fascinating look at CEO pay relative to employee pay for private companies backed by private equity (PE), venture capital (VC), or corporate venture capital (CVC).

If you follow politics and the newest rule changes on requirements for public companies, you know that beginning this year public companies are required to release data on the pay of their chief executives relative to the typical employee (median pay).

The Pitchbook study plays along with this requirement, but instead of focusing on public companies, Pitchbook’s study focuses on, as just mentioned, CEO pay relative to the median employee pay for companies backed by PE, VC, or CVC.

Take a Guess

Before looking, take a guess at what the ratio of CEO pay to median employee pay is at PE, VC, and CVC-backed companies.  Would you guess a ratio of 5?  That would mean that for a company with a CEO making $1 million per year, the median pay for an employee would be $200,000.

CEO Pay to Median Employee Pay with All Employees Included

The following is the first look at the figures.  Perhaps surprisingly (presuming you’re one of those individuals that thinks CEO pay is astronomically higher than non-CEO pay), the ratio of CEO pay to median employee pay at PE, VC, and CVC-backed companies is far from the 5 ratio suggested previously.  Instead, at the median, the typical CEO earns about $300,000 per year while the median employee pay is about $150,000.  This is a CEO/median employee pay ratio of 2.

Interestingly, at the maximum, the CEO pay to median employee pay ratio is on the low end at about 1.8 ($1.1 million/$600,000).

pic1 Source: Pitchbook

CEO Pay to Median Employee Pay with Non-Director Employees Included

In addition to the traditional reporting – i.e. including all employees – Pitchbook also released figures on the compensation of CEOs compared to non-director employees.  Unsurprisingly, the ratios are larger with this comparison. As reported in the following figure, the median ratio is about 3.8 ($300,000/$80,000).  This is a fair bit larger than the CEO pay to all employees median pay of 2.

Perhaps even more interesting than the jump in the pay ratio at the median is the pay ratio difference at the maximum.  For private companies backed by PEs, VCs, and CVCs, the ratio reported by Pitchbook comes out at about 5.5 ($1,100,000/$200,000).

If one believes some of the figures reported by public companies, the average CEO pay to median employee pay for public companies is a massive 204.  Perhaps it is beneficial to have PE, VC, and CVC backers?  Individuals running PEs, VCs and CVCs generally have a stronger incentive to control costs associated with corporate executives.

pic2 Source: Pitchbook

Conclusion

In an interesting look at CEO pay to median employee pay at companies backed by PEs, VCs, and CVCs, Pitchbook’s reported figures suggest a much lower ratio of CEO pay to median employee pay compared to public company ratios.  Why this is so is a topic for another day, but it does suggest some interesting dynamics in play when it comes to executive pay at public companies compared to private companies.

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Every year Job Search Digest reviews what happened with private equity cash compensation.  Would you guess cash earnings went up or down in 2016?  What percentage of earners made more than $1 million?  How many made less than $50,000?  Here’s a look.

The 2015 Picture

Before going into the 2016 results (the report’s entire results are available for purchase), here’s a look at how things looked in 2015.

In 2015, about 1% of respondents made over $1 million, while 6% made between $500,000 and $1 million, 18% made between $300,000 and $500,000, and 11% made between $250,000 and $300,000.

On the other end about 15% made between $200,000 and $250,000, about 20% made between $150,000 and $200,000, about 18% made between $100,000 and $150,000, about $10% made between $50,000 and $100,000, and only 1% made less than $50,000.

2015CashEarnings Source: Job Search Digest’s Private Equity & VC Compensation Report

The 2016 Picture

Shifting now to the 2016 picture, here’s that look.

Overall, about 1% of respondents said they made more than $1 million in 2016, about 8% of respondents said they made $500,000 to $1 million in 2016, about 23% of survey participants indicated they made between $300,000 and $500,000, about 11% made between $250,000 and $300,000, and 15% made between $200,000 and $250,000.

On the so-called lower end of the private equity earnings spectrum, about 20% of respondents said they made between $150,000 and $200,000, about 15% made between $100,000 and $150,000, and about 7% said they made between $50,000 and $100,000.  Not bad compared to pretty much any other industry.

2016CashEarnings Source: Job Search Digest’s Private Equity and VC Compensation Report

What Changed from 2015 to 2016?

With 2015 and 2016 both addressed, here’s a look at the difference.

Interestingly, a full 40% of survey participants said they made between 0 to 15% more than in 2015, while 28% of respondents indicated they made about the same in 2016 as in 2015.  Perhaps surprisingly – because of how low the figure is given the lumpy nature of private equity pay – only 7% of respondents said they made less in 2016 than in 2015.  About a fourth of respondents (24%) said they made 16% to 100% more in 2016 than in 2015.  Overall, 2016 was kind to the private equity industry.

Perhaps the biggest surprise from the report is how many survey participants indicated they made more than double in 2016 than in 2015.  Fascinatingly, only 1% of respondents made double what they made in 2016 compared to 2015.  Remember, the list of people responding to Job Search Digest’s report included many partners and other high level executives.  Perhaps a little disappointing on the high end of the spectrum, although if you’re lucky enough to be working in the private equity industry and earning average pay, you probably won’t get much sympathy from the average wage earner making $14 per hour.

HowThingsChanged Source: Job Search Digest’s Private Equity and VC Compensation Report

 

Conclusion

In a look at what’s going on with private equity earnings, Job Search Digest’s results indicate that about 65% of respondents made more in 2016 than in 2015, about 28% made the same as in 2015, and only about 7% made less in 2015 than in 2016.

Perhaps even more surprising is how many didn’t make $1 million or more.  Only about 1% of Job Search Digest’s survey participants made $1 million or more.  Only 1%!  Interestingly, about 43% made more than $250,000, while only about 16% of survey respondents made less than 22%.  All in all, it’s a good time to be employed in the private equity industry.

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Thinking about Carried Interest In Light of the Incoming Administration’s Tax Proposals

January 23, 2017

With the 2016 U.S. presidential election over, and tax reform at the top of the agenda, now seems like a good time to think about particular aspects of the incoming administration’s tax proposals.  One of ideas floated by the Trump administration is to tax carried interest. What is Carried Interest? Simply put, carried interest is […]

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What Does the Recent IPO Weakness Mean for 2016 Bonus Pay?

May 16, 2016

Last year was a relatively rough year for IPOs.  According to Renaissance Capital, IPOs in 2015 were down over 30% from their 2014 level. The start of 2016 doesn’t appear to be offering any sort of relief anytime soon.  The IPO market is in a deep freeze. The question here is – what does the […]

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CEO Pay: Does the Financial Industry Win?

March 21, 2016

There is perhaps no more contentious issue that compensation.  The contentiousness becomes even more heated when discussing CEO pay. Question – which industry has the highest paid CEOs? Here’s a look at average CEO pay and CEO pay growth by industry according to recently released figures by Pitchbook. Before looking, which industry would you guess wins?  Finance?  […]

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Was 2015 the Bonus Peak or Will 2016 Surpass It?

March 7, 2016

In the private equity and venture capital world, as with most any other industries, money talks.  More so than in most other industries, in the private equity and venture capital industries, money not only talks, but often controls the conversation. The current discussion point here is – can 2016 bonus pay beat what appears to […]

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The Value of Human Intelligence in Private Equity

February 22, 2016

“Knowledge of the spirit world is to be obtained by divination; information in natural science may be sought by inductive reasoning; the laws of the universe can be verified by mathematical calculation: but the dispositions of an enemy are ascertainable through spies and spies alone.” —The Art of War – Sun Tzu – 500 BC Any […]

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Looks Like Base Salary Is Taking a Larger Bite of the Compensation Pie

January 25, 2016

Two interesting movements occurred in the most recent Bureau of Labor Statistics’ release of employee compensation in the finance and insurance industries. First is the percentage of total compensation devoted towards wages and salaries and second, average compensation per hour. Which direction would you guess the two are heading?  Are wages and salaries eating up a […]

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Some Highlights on Job Search Digest’s Private Equity and Venture Capital 2015 Compensation Report

December 29, 2014

Job Search Digest recently released their 2015 Private Equity and Venture Capital Compensation Report.  In it is a great deal of detail about how firms reacted to the changing market conditions in 2013 and 2014.  Among the various interesting findings, here are three. Job category with Highest Bonus as a Percentage of Total Compensation Of […]

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