How will you retain your favourite employees if your fund has assets under water and you are planning on paying no discretionary bonuses this year?

The topic of conversation among investment professionals these coming months will be year end bonuses. The value of carry has been cut significantly and the prospect of bonuses in private equity funds that have had to writedown assets is low. We hear some HR professionals argue that “a job is a bonus” and agree, to some extent. If you decide to pay no bonuses across the board you risk that your best people will start looking over their shoulder. And there will be opportunities out there for them, we see the evidence in the market. So do you run the risk? We think you can manage this risk and manage your team’s expectations.

How? Tell your key people as soon as possible that you want them to ride the storm with you. Involve them in your plans to minimize losses in the underperforming assets and explain your strategy to seize the next opportunities that will arise from the market bottoming out. Tell them it is your priority to look after them and at the end of the year, stay true to your word and pay those key people you want to keep. The rest can wait.

So how much bonus should you pay the stars despite the losses? We believe that bonuses will be significantly lower than last year but they won’t be zero. Also, we think many funds will consider raising base salaries as we have seen starting to happen in a number of investment banks. Bonuses have been paid out to junior investment bankers this summer, albeit 50% down from last year. And base salaries have been increased by much more than previous years to maximise retention. We think they have put their best foot forward to retain their top talent and the move will be effective in the long term.

In the case where funds are underwater and have to be wound down, there will be no room for bonuses across the board. The goal is to manage the assets until the exit and minimise losses. But if they cannot see the incentive of staying, why would they? We think these investment professionals will have a harder time finding alternative job opportunities, and your risk of losing them will be lower. Prospective employers value loyalty and want to see how people perform in the tough times. It will bode well for someone to demonstrate they did not just jump ship but demonstrated resilience and creativity in achieving the best possible exit for their underperforming investments. We see that some people will have to put up with no bonuses for the next couple of years while the funds wind down. In the end, they can at least sell their work ethic and demonstrate that they do not leave unfinished business.

We’ve seen an increasing number of skilled HR professionals join private equity businesses. And what a difference they can make.  At PER we first meet them during a recruitment process. And from our perspective, having a well informed, organised coordinator for recruitment is a fantastic benefit.  But for the private equity team itself it can make a huge difference to the success of a recruitment programme. 

The HR professional can sit with the investment team to scope out the requirements, assess current team members for potential internal moves, beauty parade recruiters, ensure value for money in recruitment costs, promote the firm to candidates, participate in and coordinate the assessment process, manage remuneration negotiations and deliver a great induction programme for the successful candidate when they join.

And those are just the benefits in the recruitment process.  We’ve seen talented HR professionals play a major role in many facets of the business such as developing its people, improving the management skills of the senior team, enhancing internal communication, streamlining comp and benefits and driving some major organisational structural changes through.

So when does a private equity firm decide to add an HR professional to its team? Usually when the growth of the business has begun to highlight weaknesses in the organisational structure. Perhaps some key people have departed, succession issues are looming, there are too many people now for the business to be run informally by the founder and  everyone has a different job title and a different pay scale.

The costs of adding this key person are soon outweighed by the benefits if star performers are retained, recruitment costs are managed and the investment team’s time is optimised.

There is now a body of experienced HR professionals who understand private equity and its nuances and know how to make a difference.  And I don’t know of any team with an HR professional on board who would go back to the good old days when they did all that ‘people stuff’ themselves.