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| Industry View |
Compensation Is the Key
Hannah Shaw Grove, Usha Bhate & Russ Alan Prince
03/01/2007
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Hannah Shaw Grove, an author and columnist, is an expert on the
behavior, concerns and finances of affluent consumers.Usha Bhate is a director at Institutional Investor, an
international business-to-business media group, where she focuses on the
educational needs of affluent and institutional investors.
Russ Alan Prince is the president of Prince & Associates, a
market research and consulting firm for the affluent, and the author of more
than 35 books on related topics. In a survey of 189 single-family
offices conducted in the fourth quarter of 2006, we questioned executive
directors about the structure of their compensation and its relationship to
performance; their job satisfaction and its relationship to compensation; and
their perspectives on the role of the executive director now and in the future. 
Executive directors of single-family offices are compensated in
one of two ways: as an employee performing a task for a salary, or as a
participant in the business, and as such, eligible to share in the upside of
certain investments and eligible to be rewarded for the achievement of specified
goals (see Exhibit 1). Roughly two-thirds of executive directors
identified themselves as employees and the balance considered themselves
participants.
UPPING THE ANTE
The question we are asked most frequently is: "So, how much money does it
take to start a family office?" The old rule of thumb was that roughly $100
million was needed to support a single-family office, but our research has
revealed a far different reality. The average net worth of the families in our
study with a single-family office was $601.4 million, with average investable
assets of $488.3 million. Similarly, among the families in our study that were
members in a multifamily office, the average net worth was $113.7 million, with
average investable assets of $74.3 million. |
Interestingly, the size of the family office had no impact on
the nature of the executive director’s role. In fact, employee directors worked
at offices with higher mean and median assets under management than did the
participant directors, although both types of directors were employed at offices
with a wide range of total assets (Exhibit 2).The major differences between the two types of directors were
more clearly illustrated when we deconstructed their compensation. Employee
directors had a compensation range from $86,000 to $580,000, with a mean total
compensation of $303,000 and a median total compensation of $205,000.
Participant directors, however, were remunerated at much higher levels. The
range of compensation for the participant directors was from $0 to $4.2 million,
with a mean total compensation of $3.3 million and a median total compensation
of $1.9 million. Some participant directors perform their duties without
receiving a salary or benefits and are compensated solely on the performance of
the family office. This arrangement is seen most frequently with executive
directors who carry responsibility for investment oversight or are family
members, or both (Exhibit 3).
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