Frequently, people scoff at the compensation received by CEOs in the private equity market. Much of this criticism is the result of not understanding the source of compensation and not knowing that some compensatory sources aren’t just salary. It’s true that the CEOs of the largest firms in America make 271 times the average worker’s pay, according to the Economic Policy Institute. However, multiple sources are at play.
Take Stephen A. Schwartzman, for instance. He is the founder and the chief executive of the Blackstone Group and one of the wealthiest CEOs in America. His total pay in 2017 was $800 million. He’s just one example of how CEO compensation is rising in the private equity market.
GoBuyside, specializing in talent recruitment in the private equity industry, outlined the forces that increase venture capital compensation and private equity. These forces are what put more money in the pockets of CEOs in the private equity market.
One of those forces is the fact that there aren’t many investment professionals out there, so the competition is fierce. GoBuyside sees private equity as a “sport” because an investment professional develops skills that can be taken with them from firm to firm. These skills and the experience that come with them are valuable because they are difficult to replicate. To get the best talent, private equity firms continually increase compensation to avoid losing top talent to competing firms.
The one way for a firm to close in on the best investments is to have the best talent. In an industry with zero salary caps, the sky is the limit for these professionals, and they know it. Their careers progress and so does their annual compensation, especially since that compensation is tied to the success of the firm. GoBuyside pointed out that aligning compensation with incentives drives performance.
GoBuyside would know what drives performance since the company specializes in recruiting the top investment talent for hedge funds, private equity firms, advisory platforms, investment managers, and Fortune 500 companies all over the world.
GoBuyside also knows that another major force is negotiating power. Pension funds and endowments are two of the largest contributors to private equity funds. Investors will provide their capital to firms that the investors feel will give them massive returns. If a private equity firm has a long history and well-established track record, the firm has the necessary leverage to negotiate lucrative management opportunities with fees to match. Fees have grown as the capital has grown, another contributor to the increased compensation received by private equity CEOs.
GoBuyside pointed out that increased compensation is also the result of a robust M&A landscape combined with a low-interest-rate environment. For a decade, the U.S. and the entire world have been operating with low interest rates, which has encouraged some investors to take very high risks. At the same time, mergers and acquisitions have been occurring at a very high rate. Combine these two factors, and it is re
vealed that private equity firm managers and CEOs have used the opportunity to purchase companies. While there is a lot of risk in leveraged purchases, much of the risk is ignored since investment alternatives haven’t been as attractive as they used to be. Investing is a game of money and risk, but the lucrativeness has made the private equity market grow.
Much of this is reflected in GoBuyside’s 2018 compensation study, which is a comprehensive venture capital compensation and private equity benchmark. The data is unbiased and independent and gives information on salary, bonus, and other sources. The information provided in the study came directly from professionals in the private equity industry. Compared to GoBuyside’s 2016 report, it was quite apparent that the earnings of most private equity CEOs have grown, which coincides with growth in their firms and the industry as a whole.
All in all, GoBuyside has helped provide more color on why CEOs’ compensation , esis more than 200 times the regular employee salary. It is a competitive industry and salaries for investment professionals are going to continue to grow as their talent becomes more in demand by top firms looking to retain and attract professionals that are going to grow investor numbers and profits. CEO salaries are also going to continue to climb as more revenue sources come into play throughout their careers. These additional sources coincide with the growth of the industry.
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