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Performance Fees and Hurdles: Paying Executives and Managers for Results
Adapted for endowment and foundation boards from Chapter 3 of Centimillionaire Strategies by Richard C. Wilson.
One case from my centimillionaire book still comes up in conversations with boards.
A large family, worth well over $500 million, was negotiating pay with a family friend who wanted to run their office. He asked for a $800,000 salary plus 25% of all investment returns, with no hurdle. He was pushing them to decide fast before he "became unavailable."
I advised them that something closer to 10%, or 5% to 15% above a benchmark of reasonable returns, and only on the one or two areas where he would spend the most time and add the most value, would be more in line with what I see.
What endowments can take from this
Endowment boards set pay for investment staff and negotiate fees with outside managers. The same principles apply.
- No performance pay without a hurdle. Paying a share of all returns rewards the market, not the person.
- Use a benchmark, not zero. Pay for beating a reasonable policy benchmark.
- Tie it to what the person controls. A private equity director should be paid on private equity results, not the whole endowment.
- Measure over years, not one year. Many large offices use multi-year periods for bonuses.
- Watch for pressure tactics. A rush to decide is a reason to slow down.
Base pay versus incentive
Some boards prefer lower salaries and bigger incentives. Others the reverse. It depends on your values and how much risk you want staff to take. Neither is wrong, as long as the incentive is tied to results above a fair benchmark.
Disclosure note
Private universities report pay for senior staff on Form 990. Public data on what other institutions pay their investment leaders can help a compensation committee set a fair range. ProPublica's Nonprofit Explorer hosts these filings.
Frequently asked questions
Should endowment investment staff get performance bonuses?
Many large offices pay them. Smaller institutions often don't. It is a board choice.
What benchmark should staff bonuses use?
Usually the policy benchmark set in the investment policy, over several years.
Who approves investment staff pay?
Typically a compensation committee of the board, with outside data and counsel.
Sources
- Centimillionaire Strategies, Chapter 3, Richard C. Wilson .
- ProPublica Nonprofit Explorer: https://projects.propublica.org/nonprofits/
