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As a general case in point, the more you earn the less likely you will want the public to know about it. But potentially one of the lasting legacies of the financial crisis in 2008/09 is more transparency when it comes to remuneration levels in the world of high finance. That is of course with one caveat – the world of family offices, where remuneration levels look set to remain secret and vary hugely between differing jurisdictions and investment offices within each country.

“You might not think there is much rhyme or reason behind the pay differences for investment bankers, or even private bankers,” says a London-based headhunter. “But you’d be even more confused – and amused – when comparing remuneration levels at family offices.”

Stories like the family office executive who’s paid €400,000 a year for a one day a week job in Geneva, which involves little more than opening mail, abound. Nevertheless, some coherence in the salary packages of top executives at family offices looks to be emerging in the US – or at least a better understanding of how to pay top performers.

“If you are looking to get the best talent to manage your money and taxes, you are competing not only with other family offices but hedge funds and financial institutions,” says Russ Prince, president of Prince & Associates, a US-based market research firm specialising in global private wealth. “That means you need to match that type of model and pay on the basis of success.”

The basic formula for performance-based remuneration is the belief that if an employee, and in particular a family office chief executive or chief investment officer, generates a certain level of return, then he or she is entitled to a slice of the pie, which can be as high as 20%. The model is a decisive move away from the salary and bonus structure that dominates family offices at present. Once the principle of participation has been established, however, there are innumerable ways to structure the employment contract, based on variables from performance benchmarking to tax jurisdiction and risk appetite. A family that generates income from property will necessarily impose a different income and capital profile than one that focuses on private equity, and remuneration packages must be sufficiently specified to take into account those variables.

“If you decide that people are going to get paid on the basis of success then you are compelled to enter into a process whereby you define what you mean by success, and then set up rules for how that might be achieved,” Prince says. “For example, you may well want to look at deferred income and then you need to think about how you structure that income for tax. You need to put all of this in the mix and sit down in the family — it’s a negotiation process, and it can go on for many weeks.”

In a survey last year of 209 executive directors of single family offices, Prince & Associates found some 56.5 % said they were employed under the traditional model, while 43.5 % said they had some form of participation.  Among family offices surveyed around 58 % said they considered their primary objective was wealth creation, while 42 % said it was wealth preservation. The mean net worth of the family offices was $623 million.

The average total pay among SFO executive directors rose sharply in 2009 to $2.9 million, from $1.8 million in 2008, the survey says. The vast majority of the pay was the bonus, which accounted for $2.6 million in the 2009 figure. The difference between income paid to those who had participation in family office activities and those that were employees was stark. The average pay for executives who participated was $6.2 million, while the average pay for employees was $340,000.

Not surprisingly given the numbers, wealthy families have shown themselves to be somewhat resistant to adopting the participation model, say analysts. However, among forward thinkers there is an acceptance that in order to get the best people, equipped to generate outsized returns, some sacrifices are required.

“Families are fighting it because it’s going to cost them more money, but you need to pay people what they can earn elsewhere,” Prince says. “Top people are not interesting in downsizing, and they want to earn more money not less.” The enormous salaries available in the US are attracting attention in Europe and elsewhere, where SFO executives do not habitually expect to be paid as much as bankers or hedge fund managers. However, some are unsure that the participation model is going to make a wholesale transition across the Atlantic anytime soon.

“There is a big difference between New York and London from our point of view,” says Simon Paul, director at London-based multi-family office Sand Aire. “There has not really been a move to a participation culture in London and there is no real sense of competition for staff between family offices and financial institutions.”

Similarly in Switzerland there was also little sign of a wholesale move to a participation approach. “The most common model we see is salary and then perhaps some participation based on increase in net asset value,” says Andreas Zimmermann, assistant treasurer at Jacobs Holding, a Zurich-based family office.  Meanwhile, there is some uncertainty as to whether the rates of pay suggested in the Prince survey are mirrored in a wider context.

“I do not feel from a European perspective that family offices are paying as well as big financial institutions or fund managers,” says Christian Sulger Buel, chief executive of search firm Sulger Buel & Company. “Certainly we have seen a return of confidence after the downturn but levels of pay are pretty stable.” Consulting firm Cambridge Associates in 2008 – the latest one available – conducted  a Global Family Office Compensation Survey, taking 36 family offices across 10 countries with individual assets of more than $1 billion. As might be expected, the company found wide differences in pay depending on staff roles, though generally pay was lower than in the New York survey.

The mean base salary for a family office chief executive in the Cambridge survey was $581,000, with average total compensation of $906,000. Chief investment officers were paid a basic of $484,000, and an average total compensation of $1,448,000, while chief operating officers received $456,000 basic, and $740,000 in total.

Compensation was split into four distinct elements, comprising incentive compensation, co-investment, side-by-side investment with family and one-off bonus. For a chief executive, incentive compensation made up 30 % of income, with 44 % consisting of either co-investment or side-by-side investment, and the rest bonus. 

For chief investment officers, incentive compensation was 34%, but the investment percentages were higher – amounting to 30% for co-investment and 46% for side-by-side investment, with the remainder paid in bonuses.

An interesting corollary to the research was how family offices spend their time, with the survey showing investment portfolio management accounted for 48% of time spent, with family office management at 20%, issues and meetings at 13% and the rest split between philanthropy, liaising with the family business and other activities.

As the move to participation gathers pace, executive directors point out the increasing importance of defining roles, but also of retaining the core values associated with family offices. With participation schemes come targets and benchmarks, which can erode the sense of trust necessary to run a successful operation, some say. “We have a problem with performance based remuneration because it’s not really what being a family office is all about,” says Paul. “It puts employees in the wrong frame of mind and it may lead to conflicts of interest.”

The idea that the family office must somehow be above the profit motive is widespread, says MJ Rankin, president and chief executive of consulting and executive search firm The Rankin Group. Access to participation schemes is often limited to areas where financial services models or remuneration are common, she says. “In reality if you are chief investment officer or senior executive and you have been with a family office for some time then participation will be a discussion point. However, in the majority of cases the primary motivation for taking family office jobs is not the opportunity to make a lot of money.”

Often those motivated to increase their personal wealth do not have the values and attitude that will make them successful in a family office environment, Rankin says. “With some exceptions, those with a corporate attitude toward reward systems and moving up and making more money tend not to do very well,” she says. “At the end of the day these are service jobs first and foremost.”

Jonathan Bell, chief investment officer at London-based Stanhope Capital, says that wealthy families were likely to be focused on longer term investing than their employees.  Senior executives at Stanhope, however, are encouraged to participate in the same investments as those recommended to clients, creating a strong alignment of interests. “It’s a great motivator to get it right if you are invested yourself,” Bell says.

In deciding whether to move to a participation model, the question of motivation and how to encourage the right type of behaviour is central to making the transition a success. According to Prince that means setting a compensation structure that combine tax efficiency with deferred pay-offs, which addresses the issue of short-term risk taking.

Typical structures might see salary paid in the form of a non-recourse loan offset against future earnings, the use of captive insurance companies to generate tax free growth on deferred compensation, or the setting up of corporate structures that enable employee income to be taxed as capital gains.  Where trust or escrow accounts are used, a family might buy an insurance policy to cover future payments to the employee or his family, and combine it with a claw back on the account.

The key to these types of arrangements is flexibility, Prince says, and a willingness to enable family office executives to generate high levels of personal income. “If as a family you want to make the highest possible returns, then your employees should understand the more you make the higher they are going to get paid.” Family offices considering moving to a participation model should proceed with an element of caution, says Andrew Tailby Faulkes, private client partner at Ernst & Young.

“We have seen some UK-based family offices adopt a more racy compensation structure but it can get quite messy,” he says. “If for example you look for some sort of profit share there can be tax advantage to the family, which will pay less tax on the remaining share of their profit, but the law can be much more difficult for all concerned if things go pear shaped.” In addition, the tightening of rules relating to the use of trusts for remuneration purposes has made it more challenging to achieve efficient tax structures.

 “It was previously possible to set up a trust for the benefit of employees which would avoid an immediate charge to income tax, and one could contrive later to get the benefit of the trust,” Tailby Faulkes says. “The UK government has now pretty much killed those off.”

A crucial decision for families looking at different compensation models is to distinguish between employees whose purpose is to create wealth and those charged with preserving it. That distinction can also make a huge difference to levels of remuneration, with wealth creators getting paid at much higher levels, assuming they are successful.

Wealth creators made an average income of $4.3 million annually, the Prince survey showed, whereas wealth preservers took home a relatively conservative $910,000. For wealth creators the bonus accounted for the lion’s share of total income, whereas for wealth preservers the proportion of salary to bonus was much more equal. “The highest paid executives by a long way are participant wealth creators,” Prince says.

Of course, for many family office employees, there is more to remuneration than money, and the most successful employers will likely be those that recognise the benefits that can accrue away from financial rewards. “For good people the attraction of being in a business like a family office is that it has integrity,” says Paul. “There is a group of people who prefer to work for a business where they feel comfortable and are doing good, and they are prepared to give up a fat salary check because they enjoy the work.”

For employees that look beyond their own enrichment, the type of benefits that might replace higher salaries would be provision of tuition fees for college, or the offer of holiday properties not in use. Others might be interested in management training or development programmes.

“Family offices are driven by making a difference for other people,” says Rankin.”Successful employment is getting into the DNA of the person, finding out what they value and allowing them to do a job that gives them that. If that is done right then over time people become happier.”