The Compensation Game: While opportunities abound, firms entice partner-level VCs to stick around –

If compensation indicates demand, senior-level partners at private equity firms are hot commodities these days. Their salaries, bonuses and carried interest distributions are swelling at a faster rate than the compensation of other members of the firm primarily because their bosses want them to stay put.

With numerous years of VC experience, senior-level partners are often presented with opportunities to join other private equity firms, take operational roles in start-up companies or start VC firms of their own. To avoid such potential loses, firms increased the average total pay package – salary plus bonus – of senior-level partners 89% to $1.04 million in 2000, according to a compensation survey of over 100 private equity firms, conducted by William M. Mercer Inc. Performance & Rewards Consulting.

“It is important for firms to retain senior-level people because they are the most valuable,” says George Levert, a managing director at Kinetic Energy, based in Atlanta. Typically, senior-level partners have spent about three to four years at the firm and are on the verge of becoming managing general partners, he said. “People will be very focused on keeping them interested.”

Investors in the junior partner/principal role were second in line, with an 82% increase, earning an average $361,000 in 2000, while managing general partners saw their total compensation double to $1.24 million. Falling in between were mid-level partners, senior associates and associates, whose average incomes went up by 45%, 53% and 65%, respectively. Analysts, who earned an average $84,000 in 2000, gained the least ground, increasing only 24% from the previous year, the survey reported.

High risks reap high rewards – that is, if everything goes according to plan – which has been the case of late, and the results of the home run deals are most clearly noted in the carried interest distributions. In 2000, managing general partners brought home an average of $2.5 million in carry, compared with $1.0 million by senior-level partners and $237,000 by mid-level partners, the survey reported.

Looking back as few as five years, only partners received part of the carry, but because of the competition in the marketplace, partners have been pushing the carried interest down further and further into the organization, R. Michael Holt, a principal at Mercer says. Nonetheless, the lower-level investors’ spoils were negligible when compared with that of the senior players. It is important to note, however, that profits from the carried interest are most likely reflecting stakes allocated three to four years ago – from the funds with portfolio companies that liquidated between 1998 and 2000. “Anybody who had their hands on those carried interests in those funds got the big rewards,” Kinetic’s Levert says.

But even before the carry is added, investors at all levels of the VC food chain are earning well above the national mean. By comparison, the average per capita income in the U.S. last year was $21,181, according to data released by the U.S. Census Bureau in September.

It used to be that salaries in the VC industry were increasing at twice the rate of the general public, Holt says, but now they are moving at more like four to five times the general population. “They have to move faster than the general economy to attract the right kind of people to this industry,” he says.

Where to Next

TL Ventures is comfortable, although periodically annoyed, with the fact that the firm is a training ground for principal-level VCs, says Robert Keith, a managing director at TL Ventures, based in Wayne, Pa. The positive spin to that, he says, is that if other firms are hiring TL Ventures employees, the firm has quality people on its investment team, he said.

TL Ventures understands that there is always going to be a firm down the street willing to pay higher salaries, and when faced with the situation, the firm chooses not to negotiate, Keith says. TL Ventures has eight managing directors and eight investors at the principal level, with offices in Wayne, Pa., Austin, Texas, and Los Angeles.

While plenty of venture capitalists have left the business to join start-ups, George Middlemas, a managing general partner at Apex Venture Partners in Chicago, subscribes to the theory that “someone either wants to be a VC or an operator.”

He says it’s the difference between coaching many players and playing the game: “If someone comes to me and says, I’ve got a job offer with options in an operating environment,’ I say, you have to decide if you want to be an investor or an operator,’ and someone who plays the leverage game is confused in what they want to do in life.”

“The kind of person we bring into our fund is someone who has 10 to 12 years of experience prior to joining the VC business,” Middlemas says. “We don’t hire people right out of business school and train them.”

Investors Needed

According to the career services office at Harvard Business School, 8% of the M.B.A. graduates in the class of 2000 chose professions in the venture capital industry, down from 12% a year earlier, a possible indicator that the pool of candidates is decreasing.

Often times, there is a definite shortage of skilled people within a specific region, and the competition for them is greater. “In our region, VC firms don’t have a lot of people to choose from,” says Jean Balek-Minor, a general partner at Northwest Venture Associates, based in Spokane, Wash. “We rely on people with good relationships in the Northwest, who know other players in the region,” she said.

Firms are raising more capital today than in the past and the most senior people need to bring in younger talent to assist with investments, says Daniel Ahn, a principal at Woodside, Calif.-based Woodside Fund. The firm is investing its $140 million Woodside Fund IV, which closed in March, in early-stage Internet, e-commerce, computer software, telecommunications and networking companies mainly on the West Coast. “[VC firms] need [people with] operating experience and VC experience and that’s just hard to find,” Ahn says.