Managing Partner, Philadelphia, Co-Leader, Impact Investing
It’s one of the biggest trends on Wall Street—deciding what companies to invest in based on both a firm’s profit prospects and social impact. But now that the so-called impact investing market is now worth about a half trillion dollars, experts say the price to find the best talent in the field will become considerably more expensive.
The massive growth is driving demand for top talent, and finding talent with a “finance brain and philanthropist heart” is a bit like discvoering a unicorn, says Kate Shattuck, co-leader of Korn Ferry’s impact investing practice. Shattuck and other Korn Ferry compiled an industry outlook based on in-depth conversations leaders at eleven organizations leading the impact investing movement. “Finding talent that can produce measurable financial and social returns is harder than ever,” says Shattuck. “Leaders need to be more intentional about attracting the right talent.”
For traditional impact investing firms, that poses a compensation challenge. Many impact investing funds grew out of non-profit organizations or a family or private wealth fund, with the philanthropic mission of doing good taking precedence over being paid well. Now, however, more established private equity, venture capital, and investment managers are moving into impact investing. A new study from industry trade group Global Impact Investing Network values the impact market at $502 billion, making it one of the fastest growing areas of asset management. As more focus is put on environmental stability, equality, and social impact, and a new generation overtakes the workforce, that growth is only going to continue. To be sure, Shattuck says the momentum in impact investing stems from young, high potential financial and digital talent wanting to get involved in the industry.
Talent, of course, drives performance, and that is particularly true with investing. Brian Dresch, associate client partner in the executive pay and governance practice at Korn Ferry, says the increased money flowing into impact investing, growing demand for qualified talent, and competition with the broader private equity and venture capital industry is driving pay levels for impact talent higher. For the first time in the nascent industry’s existence, for instance, Dresch says he’s seeing impact investing firms “looking at ways to carefully design annual and long term incentive packages.”
Firms with more conservative compensation packages tend to align with a nonprofit model, with modest base salaries, limited incentives, and no formalized carried interest structures. Others are designing packages that look more like traditional private equity or venture capital models, with a base salary, annual incentive and carried interest. Annual incentives, if offered, are at a range of between 10% and 40% of base salary.
Dresch says carried interest, which is the share of profits an investment manager receives, is becoming a hot button issue. Firms use carried interest to align the financial interests of fund managers and fund investors, but managers can receive carried interest even if they personally don’t contribute any money to the fund. But investors are pushing to change that, not just by tying carried interest to financial performance, but also to social impact performance.
“It’s almost a requirement now that managers are aligned with investors on both financial and social goals over the long term,” Dresch says. Korn Ferry research shows that impact firms vary in when they award carried interest, the percentage awarded, who is eligible to receive it, and how it vests.
Shattuck says getting the compensation structure right is paramount since investing teams are generally small and turnover can disrupt fundraising and portfolio performance. “Recruiting and retention are key to impact investing,” says Shattuck. “The challenge impact firms face is striking a balance between structuring a highly competitive compensation package while ensuring it complements the mission-driven culture.”