Designing staff bonuses and carry for billionaire family offices

Built on Chapter 2 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

An incentive agreement should explain what an employee has to achieve before the family owes additional compensation. Carry and bonuses can reward a valuable contribution, but a vague promise of participation can create a long dispute about which assets and results belong in the calculation.

Chapter 2 discusses compensation that gives talented employees a reason to stay and contribute to long-term results. I would turn that idea into a defined agreement with a calculation the office can reproduce and terms qualified advisors have examined.

Name the contribution being rewarded

Distinguish finding an investment from evaluating it, closing it, and managing it after closing. Different employees may contribute at different stages. The family should decide which work earns participation before an attractive outcome makes everyone interpret their role broadly.

Include the office leader where the assignment warrants it. Chapter 2 cautions against expecting leadership over an investment organization while ignoring that responsibility in compensation. The answer is a considered agreement about contribution and authority.

Keep the covered assets specific

Identify which investments fall within the arrangement and when coverage begins. Existing holdings may have gains created before the employee joined. New money added later may require different treatment. The family needs those distinctions resolved in the records and documents.

Avoid promising a share of everything as a substitute for designing a package. A broad arrangement might be appropriate in a particular case, but it should be a deliberate decision with a understood economic effect. Have the office calculate what the provision would mean under materially different outcomes.

Examine when money leaves the investment

When explaining investor alignment, I caution that fees can return a sponsor's contributed capital while investors remain exposed. That principle also belongs in an internal incentive discussion. The family should see when staff are paid relative to the risk that remains with the owners.

Timing can change the meaning of a reward. Compensation based on an interim valuation differs from compensation paid after realized proceeds. Ask the relevant professionals to explain both the measurement and the treatment of a later reversal.

Test unfavorable outcomes

Have the team calculate the incentive under a weak outcome as well as a strong one. Include further capital contributions and expenses that affect the family's net result. The calculation should reveal whether the employee can receive a substantial reward while the family experiences an outcome it considers unacceptable.

Discuss aggregation. An agreement covering individual deals can pay on a winner while losses remain elsewhere. An agreement covering a broader portfolio has different consequences. Choose the scope explicitly and confirm that the office can maintain the necessary information.

Put approval outside the beneficiary's control

The person receiving compensation should not be the sole judge of whether the condition has been met. Assign independent checking and an authorized approver. Keep the inputs and calculation with the payment record so a successor can understand how the amount was determined.

Address conflicts when a family member participates in the same plan. The governing process should identify who can decide the matter and how that person handles their own interests. Ask counsel to establish the appropriate procedure for the actual entities and relationships.

Explain departure treatment early

Determine what happens to earned and unearned rights if the employee leaves. Include the information needed to administer any continuing interest. A family should understand those obligations before granting rights that could last beyond the employment relationship.

Have legal and tax professionals assess the proposed arrangement. A bonus and an investment participation right can carry different obligations. The employee also needs a clear explanation of the terms they are accepting, without relying on an informal summary as the complete agreement.

Give the agreement a workable owner

Assign someone to maintain the covered-asset list and prepare the calculation at the agreed time. If the office cannot identify that person, the plan is not ready to administer. Solve that problem before making the promise.

A clear arrangement lets the family reward genuine contribution without reopening the definition of the job after every result. It also lets an employee assess the offer fairly. Both sides should be able to follow the calculation from the source record to the authorized payment.

Questions and answers

Does every employee need carry? Compensation should follow the assignment. Some roles are better assessed through service and professional standards than an interest in investment proceeds.

Should performance be measured before or after fees? Define the treatment explicitly and have qualified professionals assess whether it reflects the intended economic agreement.

This page is general information, not legal advice. Family governance documents and dispute processes should be reviewed by a qualified attorney.