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What is 'The Matrix'?

It is the compensation framework that private equity pay-setters build (sometimes with no benchmark in sight) to bring order to their reward structure (*). And it is breaking. I have been speaking with my colleagues who cover the French, US, and Nordic regions, and it seems that a large number of funds across these geographies are still struggling to formulate their response to last year's investment banking compensation increases. The majority of the large cap firms, most exposed to compensation level considerations in associate offer acceptance, have given some focus to the bank’s pay increase activities. Broadly, we have seen a c.20% base salary increase, tracked by bonus, amongst these firms, mirroring steps taken by the investment banks. However, many of their mid-market peers do not share this willingness to flex the matrix: a large number are unwilling to raise before they have to. Some have gone so far as to rule out changes entirely, with one partner speaking for many in commenting that ‘if a candidate is purely focused on money, we’re not the firm for them’.

This segment has always behaved conservatively when adjusting compensation policy but there seems to be an openness to flexing up on bonus guidance, particularly in the ‘transition year’ by unwinding the pro-rating. Further to this, many funds are, for the first time, adding sign-on payments: this represents something of a breakthrough, given mid-market pay-setters (often ex-accountants) have tended to prioritise prudence and the alignment of returns and rewards in formulating their compensation strategy. Similarly, relocation bonuses seem more likely to be offered proactively: previously, the majority of candidates would have to request this of the mid-market offeror. The mid-market seems to be following the example of VC firms in giving more focus to the accompanying benefits package: early stage funds, unable to match mid-market base and bonus combinations due to their relatively lean management fee stream, have often had to do more with benefits. Their success in marketing wellness allowances, flexible working policies, and home office set-up support seems to have caught the attention of hiring managers in mid-market platforms. These are relatively lost cost-intensity items but the message they send around a firm’s cultural backdrop, particularly in relation to work/life balance, has landed well with investment bankers.

Notably, we recently saw a Swiss candidate accept a £40k compensation cut to start with a fund where he could work from his family’s mountainside home for 3-4 months each year. However, it is clear that many of the above concessions are being offered to move the discussion on from the negotiation of base salary: mid-market pay-setters recognise that whilst discretionary compensation differences can be ‘explained away’ (particularly in funds where the determination process is relatively opaque), base levels are typically built around a structured framework and so a change for one individual or year group could easily lead to calls for a wider reassessment. This is, for the time being, probably the right strategy. A few firms have implemented an associate compensation increase but have done little or nothing to adjust the pay scales of their colleagues at principal, director, and other more senior levels: the message delivered to one investment team was that a review had concluded the reward structure above entry level needed no change. This is unlikely to go unopposed for long and pay-setters may find themselves challenged to choose between their reward structure and team structure. Pressure on The Matrix will continue to build.


* - You may have been expecting a different answer if you are a follower of science fiction firms from the late 1990s

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