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PE firms tweak salary plan to increase lure of fixed component

PE firms tweak salary plan to increase lure of fixed component

Mumbai: To retain talent and stem attrition, private equity (PE) companies in India are changing the compensation structure for employees by raising base salaries and offering lower bonuses.

Base salaries on average rose by 11.2% in 2011, shows an annual compensation survey by Hunt Partners, an executive research firm. This increase is the largest the PE industry has seen in the past six years, according to the survey.

Last year, the survey reflected that base salaries increased by 1.7% and bonuses by over 80%.

“We see a movement towards higher base vis-à-vis lower bonus structure, similar to what has happened in the investment banking sector," the survey said.

A typical reward structure for PE professionals has three components: base salary, bonus and carry, which is the share of profits made on an investment, typically 20%. A major part of the compensation is linked to the carry.

“Poor visibility on the carry has led to this change in the compensation structure," said Puneet Singh, a partner at international headhunting firm Heidrick and Struggles.

Few PE investors are selling their investments in the present subdued market, impacting the carry component for industry professionals, say industry insiders.

“Given that markets have not been great, carry gets affected and attrition starts," said Muneesh Chawla, managing director at Blue River Capital Advisors (India) Pvt. Ltd, a Mumbai-based PE fund.

In 2011 so far, there have been PE exits worth $2.5 billion, down from $4.5 billion in all of 2010, according to VCCEdge, a financial research platform.

The percentage increase in the base salary structure of PE professionals is close to levels before the global financial crisis of 2008-09.

“In 2009, there was a significant drop in cash compensation in the industry. We then had a strong 18% increase in cash compensation in 2010, and with this year’s 13% increase, we’re now very close to pre-financial crisis levels, less than 3% below the overall averages across 8 levels we measured in 2008, the peak of the industry in Asia," said the survey.

“We expect that bonuses this year may be half of last year in majority of funds," said Sunit Mehra, managing partner, Hunt Partners. He expects the trend to sustain in 2012. “The bonuses are going to be much lower in 2012."

Some analysts say raising salaries is not the best way to ensure team stability.

Raja Parthasarthy, managing partner, IDFC Private Equity Co. Ltd, said investors in PE funds, known as limited partners, are reluctant to pay a management fee if it’s used merely for compensation.

“They want incentives for performance to be aligned and carry is the most powerful way to ensure this alignment," he said. “It takes time and patience to see carry distributions and that means being with the same fund for a long time to create and then realize value from investments."

The PE industry has seen some high profile executive movements in recent months. George Thomas quit India Value Fund Advisors to start his own fund; Anant Kulkarni from JM Financial Investment Managers and Srinivas Baratam from Lazard India moved to Milestone Religare Investment Advisors; and Manish Kejriwal from Temasek Holdings Pvt Ltd, Sunish Sharma and Nishant Sharma from General Atlantic Partners quit to start their own fund Kedaara Capital Advisors.

The churn in the PE industry can also be attributed to the change in the hiring pattern, say experts.

Increasingly, companies are looking to recruit management professionals to provide operational guidance and add value to portfolio companies.

“Earlier, for every seven hires, two used to be from the operating side and five from the investing side. Today, this has changed to one from the investing side and six from the operating side," said Singh of Heidrick and Struggles.


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