Bonuses are key performance related incentives to reward and retain top family office executive talent. Such incentives, which are conventionally annual rewards, remain both popular and prevalent within family offices. We believe getting them right is crucial.

Cash bonuses come in two basic forms – discretionary and objective driven. As the name suggests, the discretionary bonus is one entirely made – or not made – at the discretion of the family or principal. It affords maximum flexibility to the family and does not require a metric-based approach. To the executives, however, this type of bonus often provides the least comfort as to what they may expect to receive at the end of the year. It also acts as a disincentive to outperformance of annual objectives.

To the extent that executives value predictability, year-to-year fluctuations may not achieve the desired result. Conversely, the same bonus awarded year after year often then becomes an expected component of compensation, possibly leading to executives becoming less motivated to outperform.

We believe that an optimal payout process strikes a balance between consistency of compensation and incentivizing of performance. Objective-driven bonus structures provide an opportunity to tailor incentive compensation according to the achievement of key metrics.

It is best to keep these simple.

Identifying a small number of metrics to guide executive actions is often more powerful than structuring an elaborate and overly detailed plan. The objective-setting process should be treated as an opportunity for meaningful dialogue between a family or family principle and executives to determine the goals for the following period.

Many families adopt a hybrid approach with a few key objectives and a discretionary compensation element that provides flexibility and the opportunity for upward or downward year-end adjustments. Effective reward and retention strategies combine good process and pragmatic compensation structures that make sense for both families and executives.

Families should resist the temptation to implement strategies without first engaging in the communication and analysis necessary to find a balance between family values and executives’ needs and desires. Once an agreement is reached, both parties should seek tax and legal advice before formalizing the agreement.

Setting annual reviews, including honest conversations, are essential to ensuring effective ongoing communication and understanding. As we have reiterated in the past, the very best family office executive reward and retention solutions are those that achieve equilibrium and anticipate how things might go awry.

For more on the subject of family office executive compensation, please read our latest whitepaper.