Case Study: Carried Interest and Performance Management
Background
- The client was a large scale listed Chinese holding company with core business in direct investment including equity investment.
- The investment team had varying degree of reliance on the brand and franchise of the firm in sourcing, managing and exiting investment deals.
Objectives
- Reviewed and benchmarked current compensation package including fixed pay and total bonus to determine market positioning.
- Designed new incentive mechanism in addition to annual bonus to incent and strengthen the alignment of interest between the investment teams and the firm. The mechanism should reflect the relative contribution of teams and the firm in different stages of investment.
- Introduced an effective performance management system to reinforce pay-for-performance culture.
Process
1. Optimized Compensation Strategies:
- Determined market comparators and conducted compensation benchmarking analysis for different departments and job levels.
- Adjusted target bonus percentage based on market practice to widen bonus differentiation between front office and back office and across different levels.
2. Designed Carried Interest / Profit Sharing Mechanism:
- Introduced a waterfall structure of carried interest / profit sharing according to market practice to reflect relative contribution of the firm and the teams in investment deals, and ensured the alignment of interest among key stakeholders.
- Designed the profit allocation mechanism between the firm and the investment teams.
- Proposed the allocation within the team based on employees' levels, roles and performance.
3. Introduced a Performance Management System:
- Cascaded firm-wide performance indicators to department and individual level and determined relevant weights in terms of employees' roles and levels.
- Identified and defined each competency, determined relevant weightings and proposed rating process.
- Proposed linkage of performance ratings with bonus allocation, carried interest / profit sharing, salary increase and promotion.
Results
- The designs and proposal were approved by the Board and fully implemented.
Illustration: Major Steps for Carried Interest Mechanism
Illustration: Structure of Performance Appraisal System
Illustration: Structure of KPI Assessment
Illustration: Structure of Competency Appraisal
