Private equity's giant firms are showering their rainmakers with extra dough in big deal years—and dust during the drought

Carlyle Group Inc. last week followed the lead of larger rivals KKR & Co. and Apollo Global Management Inc. by tying the pay of dealmakers and senior employees more closely to investment outcomes. 

The firms will transfer a piece of employees’ fee income from managing assets to shareholders who prize predictable profits. They’re tweaking pay formulas to sharpen rainmakers’ focus on generating returns. 

That trade-off means dealmakers will earn more in boom years and take a harder hit in austere times. 

Staff across Carlyle and KKR would have earned some $170 million less last year had the changes already been in place, Bloomberg calculations show. Total pay would have expanded in 2021 and 2022 by roughly $300 million.

The compensation shifts reflect the balancing act private equity firms face as they morph into giant public companies. Their leaders have to keep dealmakers focused on big returns while satisfying shareholders’ desire for steady profits and stock dividends. 

Both Carlyle and KKR have signaled the changes are expected to leave compensation pools unchanged over time, and a Carlyle spokeswoman said the firm is methodically rolling out changes already unfolding across the industry.

“This is not about changing the overall level of compensation,” Carlyle’s new finance chief, John Redett, told analysts. It’s about having a higher chunk of pay driven by performance, he said. 

Volatile Compensation

The moves push more volatility in profits from shareholders to employees. 

If Carlyle’s new pay system had been rolled out years ago, employees would have made about $190 million — some 8% — more in 2021, and roughly $40 million — about 2% more in 2022, according to Bloomberg estimates. KKR employees would have made an extra $20 million or 1% of pay in 2021.Play Video

Meanwhile, total employee pay at each of the firms would have fallen by more than 5% in 2023.

The firms may risk the departure of talented dealmakers if the changes inflict even more pain during rough times such as last year. Dealmakers had muted returns with few buyers angling to take on their bets when the cost of borrowing ratcheted up in 2023. US private equity deals fell to the lowest level since 2016, according to data provider PitchBook. 

The compensation changes will ultimately generate bigger paydays if deals pick up this year. Private equity is betting that the Federal Reserve will pivot to rate cutting in 2024, which could ease the deal slowdown and bring about returns on investments.