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FastTrack to rewarding and retaining your best talent
Financial Services is highly competitive internationally and top talent will demand significant, and often complex, remuneration packages.
In addition to standard components, such as salary, cash bonus and equity awards, employees can expect an opportunity to participate in, and benefit from, the funds or investments that they manage or support.
Deferred compensation and carried interest are two of the most common forms of compensation and incentivisation, however, they’re also notoriously complex. Trying to manage and administer these schemes whilst remaining globally compliant can prove a challenge for the most advanced HR and compensation teams. How can you unleash the potential of your employees, whilst navigating the complexities of administering these reward programmes?
What are the key Executive Compensation schemes and why should you have one?
Deferred compensation – funds plan administration
A fund-based deferral is an arrangement whereby a firm operating in certain financial services sectors grant awards for the future benefit of their employees, typically in three to five years’ time. The awards are notionally or physically invested in a pre-agreed panel of funds within their own portfolio or in some cases, into shares or other securities in the employer’s business.
In addition, mandatory cash deferrals are common within these firms and employees will typically want to put those deferrals to work. One of the key drivers for having a fund-based deferral arrangement is that it allows deferred cash bonuses to be invested and grow in value.
Carried interest
Popular within private equity firms, a carried interest vehicle invests into a portfolio of employees’ funds and receives returns when investment hurdle rates are achieved. A share of the profits is realised after a defined period and the interest is carried until maturity.
Both fund-based deferral and carried interest arrangements have the advantage of aligning the interests of the employees with fund investors’, whilst also providing the opportunity to directly benefit from the success of a fund or investment. In addition, there can be scenarios where investors have requested that the employees working with their investment be aligned to the underlying fund or portfolio.
For both these schemes, the award will remain conditional, so if the employee leaves (except in “good leaver” circumstances), their right to participate will lapse either partially or in full. And whilst there’s no doubting that these schemes achieve their aim of incentivising and retaining top talent, as funds grow, relying on in-house teams to manage ever-changing tax, regulatory and reporting requirements can leave you open to risk. Maintaining accuracy and efficient access to data as your teams evolve and grow can be logistically complex and detract you from your core business.
Keeping ahead of the regulation – commentary by Tapestry Compliance
Deferred compensation
The EU’s UCITS Directive and AIFMD (and the UK’s post-Brexit equivalent of the same) place a strong regulatory motivation on private equity firms and other investment firms to implement a fund-based deferral arrangement. Through these directives, firms are required to pay at least 50% of any deferred and non-deferred portions of the variable remuneration (which includes bonuses) given to their material risk takers, in certain permitted financial instruments.
In addition to standard components, such as salary, cash bonus and equity awards, employees can expect an opportunity to participate in, and benefit from, the funds or investments that they manage or support.
Deferred compensation and carried interest are two of the most common forms of compensation and incentivisation, however, they’re also notoriously complex. Trying to manage and administer these schemes whilst remaining globally compliant can prove a challenge for the most advanced HR and compensation teams. How can you unleash the potential of your employees, whilst navigating the complexities of administering these reward programmes?
Carried interest
Carried interest arrangements are common remuneration structures. A key motivation for implementing a carried interest arrangement will be to obtain tax beneficial treatment, particularly for employees. In certain jurisdictions and circumstances, including in the UK, it may be possible to achieve a beneficial tax outcome for employees, whereby any carried interest value that is delivered to the employees will be taxed subject to capital gains taxes, instead of employment taxes. As a consequence of this, these arrangements are likely to be subject to the scrutiny of local tax authorities and governments (e.g. the UK has already identified that it intends to review the UK capital gains tax regime) and it’s essential that firms carefully operate and administer their carried interest arrangements to remain fully compliant.
What activity are we seeing?
Compensation packages are no longer based on salaries alone. To comply with regulation and to attract and retain the best talent, companies must have a robust variable reward component in addition to other benefits such as pensions and healthcare, with an administration platform to match it.
Managing the complex reward scheme requirements of a growing firm can quickly become unwieldy for in-house functions. Co-ordinators are expected to manage these highly sensitive schemes on top of other duties, ensuring data is accessible and accurate for a constantly evolving workforce while staying compliant with ever-changing regulatory and reporting requirements.
To attract and retain the best talent, companies must have a robust variable reward component in addition to other benefits.
Case studies
The demand for our Executive Compensation services continues to grow as the intricacies and associated administrative demands have increased.
Our global presence, world-class technology and ability to navigate the complexity of local regulation has led to a considerable demand for our products.
Case one
The client
This large and rapidly growing, global fund manager approached Intertrust Group to establish fund-based deferral arrangements to incentivise their employees across multiple jurisdictions. Our client wanted to deal with one provider and account manager who could navigate the different tax implications and legal structuring requirements across numerous jurisdictions. At the same time, they wanted to ensure their global employees had the same online experience with access to the one platform.
Intertrust Group established multiple deferral plans covering both trustee and administration services across these jurisdictions for the employees. Our experts liaised with the various global legal and tax advisors to streamline the rollout of the global plans and ensure consistency of plan mechanics and give access to our secure, online platform, Classic Awards.
The solution
- Hedging vehicle solutions
- Trustee and administration service offering
- Classic Awards, our dedicated cloud-based deferral online platform tailored for deferral programs enabling online functionality
- Manage multiple vesting and holding periods considering the jurisdictional framework
Our advantages
- Trustee and administration offering
- Classic Awards portal, providing the ability to manage complex structures with multiple vesting or holding periods according to each jurisdiction’s regulations
- Ability to deal with the implementation from the outset – from initial conversations to the roll-out of the plan to all employees across all jurisdictions
- Structuring the plans through the online portal, we are allowing scalability and global expansion for the company in the future
- Global presence
Case two
The client
A global private equity and real estate company with multiple international funds wanted a specialist and dedicated team to fully administer the carried interest vehicles connected to each fund. At the same time, they needed a trusted third party to keep an accurate record of carried interest points in issue and provide frequent reports for their regulatory filing.
The carry issued to the team working on a particular fund related to their remuneration package, meaning they had an indirect investment and were motivated to ensure that the hurdle rate was reached, and they would in turn benefit from the carried interest returns.
Intertrust Group worked alongside the client, lawyers and funds teams to establish the carried interest plans and ensure completion of each employees’ admissions. The vesting of the carry points was tracked based on their holding and vesting schedule agreed between the client and lawyers.
With access to Intertrust Group’s dedicated cloud-based carry platform, employees and the company coordinator can view their carry holding records across all funds.
Why
Due to the strict confidentiality of the carried interest points being issued to the employees and with there being different points, such as real and shadow being issued, it was important for the client that a third-party administrator with the speciality and understanding of the carry could perform the administration. This maintained the privacy required between the employees, funds team and other third parties.
The solution
- Provided end-to-end shadow accounting services
- Investor allocation and capital verification
- Loan processing and settlements
- Acted as a joint venture private credit fund
Our advantages
- We provide a 24/7 operating model with specialised loan operations and accounting teams who have significant domain expertise.
- Ability to provide bespoke tech-enabled services, consisting of proprietary and leading vendor technology.
- With our end-to-end capabilities and our world-class technology solution, we’re able to accommodate investor demand when it comes to greater data, portfolio and risk transparency at entity, portfolio and the fund level.
How we can help you?
We’re experts in providing trustee and administration services for deferred compensation and carried interest plans. Our team is highly experienced in managing complex and high value plans in this heavily regulated environment.
This large and rapidly growing, global fund manager approached Intertrust Group to establish fund-based deferral arrangements to incentivise their employees across multiple jurisdictions. Our client wanted to deal with one provider and account manager who could navigate the different tax implications and legal structuring requirements across numerous jurisdictions. At the same time, they wanted to ensure their global employees had the same online experience with access to the one platform.
Intertrust Group established multiple deferral plans covering both trustee and administration services across these jurisdictions for the employees. Our experts liaised with the various global legal and tax advisors to streamline the rollout of the global plans and ensure consistency of plan mechanics and give access to our secure, online platform, Classic Awards.
Our services include:
- Employee Benefit Trust (EBT) and other SPV establishment hedging plan assets
- Plan administration (funded and unfunded)
- Bespoke online services tailored to company requirements
- Flexible custodian, bank and brokerage solutions
- Payments, Forex and international remittances
- Regulatory reporting e.g. FATCA/CRS compliance
- Bespoke and periodic financial reporting
- Support for annual reporting and tax return filings
- Managing award allocations, hedging, purchases, profit allocation, switches, sales, transfers and dividend reinvestment
Our market-leading, secure online portal allows participants to access their data and documents whilst HR teams are given co-ordinator access.
The key features include:
- 24/7 secure access to participant and employer contributions, together with valuations and transaction histories
- Where plan rules permit, participants can manage plan investments via switch requests and set investment preferences for new contributions. Investments are priced daily and can be shown as notional holdings for unfunded arrangements
- Company co-ordinators can view participants’ awards at an individual and consolidated level, local employer and head office level and on a per-country basis
- The financial modelling tool helps forecast award benefits and aids decision making
- Plan documentation and associated literature, such as plan rules and operational documentation, can be easily downloaded
- All data transfer is encrypted using the 256 bit SSL encryption standard
- Single sign-on functionality
- Participants’ personal details can be simply managed
Our team is highly experienced in managing complex and high value plans in this heavily regulated environment.
What makes us different?
Global leader in providing expert administrative services to clients operating and investing in the international business environment
40 of the top 50 Private Equity International firms are our clients, PEI 300
We’re active in over 30 jurisdictions across Europe, the Americas, Asia-Pacific and the Middle-East
Powerful tech-enabled approach through state-of-the-art reporting tool
4,000+ local experts with multi-language capabilities at your side
Coordinated approach and processes by central point of contact
We have over USD 470 billion assets serviced
To find out more about how Intertrust Group can help FastTrack your executive compensation, talk to our experts today.