Single-family offices are highly customized, boutique enterprises that usually run with a small staff and may be controlling billions of investment dollars as well as addressing the wide range of legal, tax and lifestyle concerns of an ultra-wealthy family. And the degree to which such an office is successful is tightly connected to the quality and motivation of its senior executives.
While it is impossible to count the number of these offices operating worldwide, there is a general consensus among industry authorities that their numbers are increasing and the wealth they control is mounting. This trend tightly correlates to the overall growth in the number and fortunes of the ultra-wealthy.
With the boom in single-family offices, coupled with the intense interest among a wide variety of diverse professionals looking to work for these organizations, it’s sometimes difficult to source appropriate, exceptionally capable individuals to run them. Further complicating the matter is the need to suitably incentivize these senior executives.
Earning A Living
The average total monetary compensation for a senior executive at a single-family office in 2014 was $844,200 (according to a survey we performed of 134 senior executives at these offices). But the median compensation was considerably less: $385,000. This means some senior executives are being paid extremely well, while others are not. The range in total compensation went from a low of zero to a high of $14,230,000.
To get a better understanding of how senior executives are remunerated, it is worthwhile to divide their total compensation into three core components—a salary, a bonus and additional payments. When the executives do exceptionally well financially, the largest contributor is the additional payments they receive. In general, these are a function of equity participation in their offices or, more commonly, in specific investments. Or sometimes in both.
When these components are broken up, the average salary in our survey was $273,300. The average bonus was $208,400. And the average additional payments were $362,500. The median salary, meanwhile, was $300,000, while the median bonus was $60,000. (There was no median in additional payments.)
The ranges show the diversity of the payment structures. Salaries went from zero to $665,000. Bonuses went from zero to $3,550,000. Additional payments went from zero to $10,400,000.
Compensation Models
Compensation models put these numbers in perspective. Basically, there are two different types:
• Employee models: Senior executives are paid a salary and a discretionary bonus. Rarely are there additional payments. The compensation is largely determined by how the ultra-wealthy family “feels” about its performance.
• Participant models: The core remuneration for a senior executive often comes from a financial stake in the office itself, in select investments or in both.
In the employee model, the senior executives are supposedly not taking very large financial risks. The bonuses are discretionary, but they tend to fall in a predictable range, and the salary is usually fixed, growing incrementally and slowly over the years.
In the participant model, the senior executives are metaphorically “rolling the dice” along with the ultra-wealthy family they are working for. So they might make little or no money, or they might create substantial personal wealth.
Our survey of 134 senior executives found that the majority, 69.4% worked under the employee model.
Total compensation for senior management in this model ranged from a high of $765,000 to a low of $78,000, while the average was $358,700. The median was slightly higher at $360,000. The mean salary was $304,900, while the average bonus was $47,000 and the average additional payments were close to $7,000.
In the participant model, the average total compensation for senior management ranged from a high just north of $14 million to a low of zero, with the average being around $1.9 million. The median total compensation was slightly over $1 million.
The mean salary for the participant model was $201,500 while the average bonus was $574,300 and the average additional payments were slightly less than $1.2 million. While one senior executive earned more than $14 million, two of them earned nothing.
These findings, along with previous research, suggest that the employee model is fairly stable. Senior executives earn a few hundred thousand dollars per year—year in and year out, fairly consistently. By contrast, the participant model shows more earnings variation over time. There are good years (some exceptionally good) and there are bad years (some exceptionally bad).
The key to personal wealth accumulation in the participant model is in the additional payouts. These often come from the discrete investments of the single-family office that the senior executives are participating in. The investments that generally produce the greatest earnings increases are venture capital and private equity deals. But their value to executives means more during the particular years they are monetized.
These and other compensation surveys suggest that the earnings of senior executives are prone to regression to the mean. Still, by comparing total compensation figures across time, we see that the senior executives under the participant model—on average—do substantially better than those under the employee model.
Negotiating A Compensation Arrangement
Regardless of the trends, however, most high-end compensation arrangements don’t follow a set formula, nor do those at single-family offices. There are often unique considerations at each office, and benchmark data is only a starting point. It’s clear, when you examine how these arrangements are often put together, that the executive’s negotiating proficiencies come into play, and a superior negotiator tends to do appreciably better. This is the case regardless of which compensation model is used. In fact, a person’s negotiating capabilities can result in
swings of hundreds of thousands if not millions of dollars for those using the participant model.
Very telling is that the mind-set for negotiating is inherent among self-made millionaires. And when both sides adopt this same mind-set and approach, the best balanced arrangements are achieved and both parties express considerable satisfaction with the outcomes.