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Executive Compensation of Private Equity’s Elite

Executive compensation has long been a divisive issue, but in the wake of the economic recession and with the ever-increasing economic disparity that exists in the United States, it is an issue that does not seem to be going away.  In 2012, with total compensation averaging $12.3 million, chief executives at the largest firms made nearly 354 times that of an average worker. 1.  CEOs of the largest banks are usually at the forefront of calls for executive compensation reform due to their exorbitant pay packages.  For instance, Jamie Dimon, CEO and Chairman of JPMorgan Chase, saw his compensation rise 74% in 2013 to $20 million, despite the firm having to pay $23 billion in fines and settlements in the same year. 2.  CEOs of other top banks brought home between $14 and $23 million in 2013. 3.  Although these are enormous sums of money, the 2013 take home pay of private equity’s top executives dwarfs the take home pay of the top executives of the banking industry.

In 2013, Leon Black, co-founder and chief executive of Apollo Global Management LLC, received a whopping $546.3 million in total compensation, while Stephen Schwarzman, founder of Blackstone took home $465.4 million, The Carlyle Group’s three founders took home approximately $750 million collectively, and Henry Kravis and George Roberts of KKR earned about $327 million combined. 4.  Black’s compensation was more than 45 times that of the average 2012 compensation of chief executives of the largest firms in the United States, and more than 27 times the controversial take home pay of JPMorgan Chase’s Jamie Dimon.  Certain questions naturally stem from these statistics: how were private equity executives able to earn such an extraordinary amount in 2013, and why aren’t they being criticized in the same way we have seen other executives in the past?

In many respects, 2013 was a banner year for the private equity industry.  Due to favorable market conditions, many private equity firms were able to “cash out” on their investments by taking their portfolio companies public in order to reap huge profits. 5.  Since executive compensation at private equity firms is typically tied to investment fund performance (and, in turn, portfolio company performance), the success of their funds directly contributed to the high earnings of private equity’s top executives. Private equity firms’ compensation primarily consists of management fees and performance fees.  The firm typically receives 20% of the fund’s profits after a certain performance threshold is met—these are the performance fees tied to fund performance known as carried interest.  On top of that, firms also typically receive a 1-2% fixed management fee.  Also contributing to the enormous profits private equity executives receive from these performance fees is the favorable tax rate that is applied to them; the performance fees are taxed as capital gains rather than ordinary income. 6.  Additionally, executives profited from dividends paid on their “special” shares of ownership in their respective companies, which differ from common shares in that they are taxed at lower rates. 7.  With the proliferation of private equity firms going public in the past seven years, dividends on ownership shares are a fairly new income stream for private equity executives. 8.  Lastly, executives profited from their annual salary, bonuses and long-term incentives. 9.  Although annual salary, bonuses and long-term incentives are generally the largest piece of total compensation for executives in other industries, it is typically only a small piece for private equity executives. 10.

In the future, it is unlikely that the executive compensation practices of the elite private equity firms will change.  Because the largest chunk of their total compensation comes from performance fees that are tied to their investment funds’ performance, interests of management and fund investors are aligned.  However, now that many private equity firms have gone public, it will be interesting to see how management is able to manage the expectations of their common stock shareholders and their fund investors.  Nonetheless, if the executives are earning large amounts of money stemming largely from performances fees, then the firm’s funds must be performing well.  If the firm’s funds are performing well, then it is likely the firm’s stock price is steadily increasing.  As long as shareholders and fund investors are happy, which they will be if the above holds true, it is unlikely that we will see much push back regarding compensation of private equity’s elite executives.

  1. Jennifer Liberto, CEOs earn 354 times more than the average worker, CNNMoney (Apr. 15, 2013, 5:00 PM),

  2. Nick Summers, Private Equity’s Top 10 Earned $1.7 Billion in 2013, BloombergBusinessweek (Feb. 25, 2014),

  3. Id

  4. Ryan Dezember, Apollo CEO Black Tops Private Equity’s Big Earners, Wall St. J. (Mar. 3, 2014, 12:08 PM),

  5. Summers, supra note 2 

  6. Lawrence Delevingne, CNBC Explains: Carried Interest, CNBC (Mar. 4, 2014, 3:31 PM),

  7. Michael Calia, Carlyle Group Founds Took Home About $750 Million for 2013, Wall St. J. (Feb. 27, 2014, 9:58 AM),

  8. Chad Bray, Carlyle’s Co-Founder Says More Private Equity Firms Likely to Go Public, NYTimes DealBook (Feb. 26, 2014, 7:40 AM),

  9. See generally, Calia, supra note 9 

  10. Id

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Nicholas Carreri

Vol. 3 Associate Editor