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How to Think About PE Compensation

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When I first entered the financial services industry, I was told that my earning potential would be tremendous. For my first year in investment banking, I didn’t fully understand or appreciate what that meant. Since most analyst salaries are public knowledge, it can be difficult to conceptualize how compensation scales as you move up in your career.

 

Since moving into private equity almost two years ago, my awareness of compensation structures and what to prioritize in packages has grown. You may have heard of the three elements that generally determine PE compensation: base, bonus, and carry. But what a lot of young professionals don’t have a good understanding of is how to think about each element and weigh packages against each other, especially when firms are comparable in terms of qualitative elements.

 

In this article, we’ll discuss how to think about each of the three components of PE compensation and how you might think about whether a package is “good” for your personal needs in the context of the firm you may be choosing.

 

Base Salary

Generally, a base salary in PE is not entirely different from that of an investment banker or some other finance professionals. While the base salary will likely help you cover most or all of your monthly living expenses (especially if you are living within your means), it isn’t where PE professionals make most of their money. A higher base salary can give you a sense of security since it’s more guaranteed than a bonus or carry. Personally, living in an expensive city like New York forces me to discipline myself using only my base salary; in doing so, my bonus and carry are “extra” and can be used towards savings goals or wants.

 

If you are evaluating whether a base salary you have or are offered is acceptable, analyze your monthly expenses and whether they can be covered by your base salary. If they are and you have room left over, that might be a great offer for you. If it doesn’t cover your monthly expenses, that might be an opportunity to do a couple of things. First, evaluating your personal spending can be a helpful exercise here to understand if you have been spending a lot in your current role and if there are areas to cut back. If there aren’t, this could be an opportunity to negotiate a higher base salary with the company. If you have savings already, those can be used towards expenses until you get a raise or get your bonus (but relying on this can be risky, especially in down markets). As you can see, there are many considerations for whether a base salary is “good” depending on your personal situation. So, while it’s important to look at market comps and speak to others in the industry to understand if you’re being underpaid, keep in mind that comp structure can vary across PE firms, and analyzing your personal financial situation will ultimately allow you to make the best decision.

 

Bonus

Another important component of your PE compensation package is your bonus. Bonuses can vary wildly across the industry. Some might be almost guaranteed, some are highly performance-based, and some are market-based or tied to other success metrics. The amount can also vary across firms depending on those aforementioned factors or simply because of the way the firm structures packages.

 

You’ve probably heard the wisdom to invest at least a portion of your bonus, use some for fun/work towards whatever financial goals you may have for yourself. I aim to abide by this and in the past two years I haven’t invested my full bonus; instead, I invest a portion as soon as I receive it and allocate the rest for travel and other goals. One of my personal goals is to have a travel fund every year so I don’t need to worry about funding my trips and vacations. You might have a similar bucket to which you want to allocate your bonus; I find that setting that aside whenever I receive my bonus keeps me disciplined.

 

So how do you determine if a bonus is “good?” In my opinion, the answer to that question is even harder to answer than the question about base. Since a bonus can be so variable by firm and year to year, I find this to be the least important portion of compensation considerations. I’ve tended to think of it as more of a nice to have rather than a necessity (especially if you have prioritized living off of your base salary).

 

Carry

Now let’s get to the fun part and the portion of compensation where PE professionals win big: carry. If you are unfamiliar with carry, also known as carried interest, the general concept is getting paid out when your investments do well (either throughout the hold period via dividends or via a lump sum at exit, which is typically where the majority of payment occurs). Carry incentivizes PE professionals to make sure their portfolio companies perform well and deliver exceptional returns to LPs, therefore delivering significant carried interest to the professionals invested alongside them. Check out other OfficeHours blogs on carry if you would like to learn more.

 

As a junior financial professional, you may or may not have access to carry yet depending on the stage of your career. When you’re evaluating an offer, try to learn what the carry structure is like at the firm. How senior do you need to be to receive carry? How many funds can you be exposed to / invest in each of them? Are there co-investment opportunities to directly invest in deals alongside LPs? How long is the vesting period (i.e. how long do you need to stay to get your full carry, and if you leave early how much of it do you get)? Get as much information as you can from market intelligence and speak to professionals at the firm to determine whether you think it’s a good deal.

 

You might be wondering why learning about carry structures is important for juniors. For many of us in the industry, we are in PE for the long haul and want to see our carry paid out in 5-10 years after we exit investments. If you’re thinking you want to be in this career track long term, understanding the carry structure is essential to understand how your compensation will evolve as you become more tenured in PE.

 

As you think about your entire compensation package, remember to weigh these three components to understand if the package is “good” or “great” for you. Good luck in finding the best offer for you!

 

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