Everyone knows the adage ‘money talks.’ But when PERE last wrapped a feature around a comprehensive piece of research on compensation levels in 2010, we did not appreciate just how loudly. It was easily the most-read article published that year.
You might ask, given the popularity of Pay checking, why we did not repeat the exercise until now? Put simply: finding a recruitment firm willing to tie its colors to the mast in terms of what pay the analysts, associates, vice presidents, directors and managing directors of private equity real estate should command is no mean feat. After all, the pressure is subsequently on them to follow through on their forecasts.
Nevertheless, just as we enter financial year-ends for firms and bonus season for individuals, we have located a firm willing to do just that: Ferguson Partners. The global search business has tailor-made an exclusive report for PERE detailing compensation ranges within the private real estate fund management markets in the world’s major regions. The result is a rare opportunity to compare base salaries and bonuses, both at home and abroad. And, going a step further than the research in Pay checking, Ferguson Partners’ numbers also include ranges for the sector’s remuneration Holy Grail: carried interest.
Following a significant reset in industry earnings following the global financial crisis, pay inflation has remained flat, says Serena Althaus, senior managing director at Ferguson Partners. She blames insufficient numbers of post-crisis market entrants. “It is the market disrupters that typically drive wage inflation. If a new platform comes in, say from another asset class, and starts pinching from existing platforms, that leads to them rehiring, which leads to price increases. Because we haven’t seen many new entrants, we haven’t seen much in the way of disrupting forces.”
Consequently, by her reckoning, salaries in private real estate have generally kept pace with inflation only, approximately 2-3 percent year-on-year.
“There was a big drop-off right after the GFC,” says Eric Adler, chief executive at PGIM Real Estate, the real estate business of US financial services firm Prudential. “Looking back to 2007 and 2008, in terms of both fixed and variable compensation, I don’t see a percentage term meaningful shift. Not in our industry.”
In keeping with Ferguson Partners’ research, Adler says compensation levels vary relative to domestic or regional regulatory and cultural conditions. For instance, US executives have been more comfortable with lower base pay and higher variable pay than their European and Asian counterparts. But, he adds, global businesses like PGIM Real Estate strive to standardize remuneration across regions as much as possible. “To the extent it is practical, and is allowed by the customs of the local market, there is an attempt to align comp for similar roles.”
Nevertheless, the research does throw up notable nuances. US executives are better paid than their European and Asian counterparts, something Althaus attributes to a host of reasons, including greater depth in the marketplace, more independent firms not constrained by parent company rules on compensation, and higher costs of living, taking into account outlays like education fees and medical cover. “For those reasons, it’s always been a higher paying environment across the country’s financial services.”
That said, Asia’s executives are better paid than those in Europe when it comes to base and bonuses. But, unlike their European counterparts, they hardly register for promote payments until they reach considerable seniority.
Althaus attributes this to the relative infancy of the market in Asia, among other factors. “The industry in Asia is 10 years younger than the rest of the world, which means many employees have only seen one fund cycle. As such, few have seen the benefits of carry and so don’t value it at the same level. If you polled Asians as to whether they preferred carry or more annual cash, they would take the latter.”
Christopher Ip, chief financial officer at Hong Kong-based private equity real estate firm Phoenix Property Investors, believes, culturally, Asian firms may be less inclined to share carried interest among junior staff. “The culture in Asia is less generous to those on the lower rungs. You have to remember, the region has a number of home-grown companies ranging from start-ups to mid-sized and so it is more reasonable to expect the owners to be a little more constrained.”
In such businesses, it is natural for the bosses to be the key decision-makers who risk the most, both in terms of reputation and financially, to be best rewarded. Ip points out, however, that the conversation surrounding carry is becoming increasingly relevant to more people than just senior management and is a point of negotiation, particularly at firms of Phoenix’s scale, which has approximately 160 staff. “If you speak to larger US private equity firms, it’s a case of coming on their terms or not. Smaller firms, engage more in negotiation around carry.”
Adler says: “Ultimately, it’s all about the strategies you’re executing and the investor base guides this. If you’re looking at a closed-end, absolute-return strategy, they fully expect, and want, some incentive base to the fees they pay.
“The seniority point is important as it is clear investors are less focused on what junior people get. They’re doing important work, but an execution component that is relatively fungible versus people at mid and senior level who are making the difference in terms of their judgment calls.”
Ip echoes these comments: “Analysts and associates have daily requirements and are therefore looking at their annual bonuses at the end of the year. Many would prefer bigger bonuses because, compared to carry, it’s relatively more certain. Carry is a preferred payment that you don’t get after year one. You could be looking at six or seven years.”
Performance, but discretion too
How much of a bonus is received naturally depends on a firm’s performance, but also the discretion of its management. Further, investment professionals typically earn greater bonuses than their asset management counterparts, typically a multiple of their base pay versus a fraction of it. While she has seen instances of 300 percent bonuses, Althaus says: “For most private equity roles, it’s somewhere between 50 and 150 percent. Asset management roles are typically circa 15 percent discounted in terms of base salary and bonuses range from 30 to 70 percent.”
Adler concurs: “Certainly roles where the variable component is accepted, there’ll be more volatility versus certain roles which are more recurring in nature.”
While Althaus, Ip and Adler agree that compensation represents at least half the consideration for taking a job in the sector, the latter insists younger executives are finding greater motivations in other regards than before, a factor his firm is trying to capitalize on. “It is still a factor for the millennial generation, but now one of many.”
Increasingly subjected to ‘reverse interviewing’ nowadays, Adler says prospective hires are showing greater interest in areas such as breadth and variability of experiences, investor dialogue and corporate responsibility than before. “In my generation, the remuneration was an overwhelming component. Today it’s very much not the case,” he says.
Althaus adds greater scrutiny of a firm’s capital base is another, more contemporary, trend. “There have been more grown-up conversations about job opportunities since the GFC. Promises of carry used to be seen as a one-way route to riches. Now, people have woken up and realized carry can be worth nothing and they need to be sure of the longevity of a platform.”
But she also points to the current point in the cycle, following a number of post-crisis recovery years as informing sector executive’s priorities.
Citing Maslow’s hierarchy of needs, Althaus says: “When things are good, you can get pedantic about what you want. Otherwise, the first thing you’ll look at is whether a job pays well.”