To Pay or Not To Pay

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.