A study shines a light US family offices' pay plans and raises concerns on whether best practice is being followed.

About two-thirds of executives in family offices don’t have employment agreements in place, a departure from best practice, while their compensation tends to move in lockstep with assets under management, according to a study of the sector by Fidelity.

The report, by Fidelity Family Office Services, found that firms with higher assets under management figures support more family members but also have more employees, producing a higher employee-to-family member ratio. Perhaps unsurprisingly, as AuM grows, more non-family members take on executive roles. Compensation for executives is “directly correlated with AuM, especially from a total direct compensation perspective,” the 36-page study found.

Family member compensation is generally less than for non-family members – the former earn 13 per cent less in base salary and 23 per cent less in the total pay package in FOs with AuM of $500 million or less. Some 40 per cent of salary increases are above the national average; 40 per cent of family offices use a formalized annual incentive plan or a mix of discretionary decision-making and a formalized plan, the report said. 

The study, entitled insights On Single Family Office Executive Compensation, updates from the firm’s inaugural study carried out in 2015, and covers 269 FOs and reporting data on 408 executive positions. Part of the survey data was conducted from May 12 to July 26, 2017; pay has been analysed for 2017 as well as bonuses for 2016 and 2015 performance. Among survey respondents, 25.1 per cent had total AuM of $1.0 billion or more; 19.5 per cent had $500 million to $999 million; 15 per cent had AuM from $300 million to $499 million; 26.2 per cent had AuM from $100 million to $299 million, and 14.2 per cent of respondents had AuM of less than $100 million. 

On average, FOs employed 12.9 staff but that figure masks a wide variation. Among firms with AuM of $1.0 billion or more, an average of 28.9 people are employed, down to just 4.2 for those with AuM under $100 million. 

Early in the report, it singles out why employment agreements are important. “They are a recommended way to minimize potential future disputes, and are more likely to be used for executives or key employees hired from outside the firm,” it said. The report continued: “According to research conducted by Botoff Consulting, the use of employment agreements is a growing trend among investment firms and family offices. These agreements are most common for CEO and CIO positions and while considered a best practice, fewer than 40 per cent of family offices report using employment agreements for executives. Employment agreements are often implemented with newly hired executives, so their prevalence in family offices will likely increase with staff growth and as a result of attrition.”

Among other findings, the study said 82 per cent of family offices in the study awarded bonuses for performance in 2016.

The use of formalized incentive plans is a growing trend; most family offices, however, still pay out discretionary bonuses, which the report said is still not in sync with best practices. Half (51 per cent) of the family offices said they use long-term incentives for executives, with most using one or two forms of such incentives.

Authors of the report said family offices were evenly spread across the US; the Northeast (26 per cent) held the largest share of the total. Most of the responding family offices are stand-alone entities, with the remainder embedded within an operating company. More than one-third have a board of advisors/directors, with more than three out of four of these boards providing oversight of compensation governance.