Four Ways Technology Can Help PE and VC Firms Make Compensation and Carried Interest Plans More Transparent 

In recent years, private capital firms have invested in deploying technology solutions across critical business areas, such as investor relations, accounting, and portfolio management.  

Earlier this year a gathering of private equity and venture capital finance leaders in New York were asked how their carry and incentive programs are evolving. Thirty-one percent said they were seeing new carry and co-investment plan types. Nineteen percent said they were pursuing improved reporting and a better participant experience. Thirteen percent said they were working with new vesting arrangements. Another 13 percent pointed to the expansion of carry pool members. Finally, 25 percent said all of these were on their plate. 

Many of these firms are now seeking to gain the same type of improvements to controls and efficiencies within increasingly complex compensation functions and incentive plans. Many are using carried interest and compensation software platforms to provide improvements to the reporting they provide to employees and partners.  

Private equity, venture capital, credit, real estate, and other private capital firms have many complicated compensation arrangements that have become more complex as they have proliferated. In addition to standard salary and bonus details, employees are compensated through unique profit-sharing programs (referred to as carried interest plans), co-investment plans where employees invest their personal capital, and ownership in the management company. Each has unique reporting, one-off exceptions, and vesting schedules. 

In late 2021, private equity and hedge funds held more than $20 trillion in assets under management, a 63 percent increase in the past four years, the Congressional Research Service noted. With that stellar growth, private capital firms have naturally created more carry and compensation plans as new funds are launched.  As firms have grown in headcount many have also experienced headcount movement with individuals forfeiting portions of their carried interest awards and firms have added additional complexities to their compensation plans (performance hurdles, vesting arrangements, deal-by-deal allocations, co-investment loan programs, etc.).  All of these changes have led to increase operation activities to manage highly sensitive compensation details and documents.  

Historically, this highly sensitive compensation data has been managed in spreadsheets. But the industry is now turning to technology solutions. Outlined below are four recurring themes on how private capital firms are tackling the complexity of allocation and incentive plans:  

1. Aggregated Compensation Reporting Provides Transparency to Employees 

Firms are providing statements to employees that deliver holistic details across individuals’ standard compensation (i.e., salary, bonus, etc.) along with carried interest awards, co-investments, health care reimbursements, management company ownership, and reward statements. The many moving parts of new plans explain the complexity of allocation and incentives. The market for top talent is competitive. Firms are improving reporting for employees, allowing them to easily see their overall compensation. 

Given the common opacity of carried interest awards in private markets, some firms also include forecasts of projected earnings in their standard reporting. Forecasts allow employees to view their future earnings potential and their vested and unvested carried interest awards. This greater transparency can be a helpful tool to retain key employees. 

2. Participant Portals Offer Easier Access to Documents and Data 

Prior to COVID-19, managers met with their teams in person to communicate bonuses and other compensation figures. While some firms are back in the office, others operate extensively online. Many are now offering digital portals where employees can easily access their documents, data, and analytics. Additionally, employees can digitally sign and acknowledge their receipt of different employment documents and compensation statements. This improved reporting for participant experience, even as the number of carry pool members increases and new vesting arrangements emerge, dramatically improves employee satisfaction. 

3. Firms are Improving Firm-Level Analytics to Assess Overall Awards and Manage Joiners and Leavers 

Fundraising is now down from all-time highs. Still, funds launched now have enormous opportunities for growth. Employee carried interest awards need to be structured for these new entities. Companies conduct scenario analysis and reporting to ensure that they fairly compensate their existing and future employees. At the same time as firms are raising funds, the overall economy is faced with inflation and a potential recession. With these market changes, management of carried interest and compensation activity falls to the already lean teams that manage this data. 

Firms need “push-button analytics,” top-quality UI dashboards, and drill-throughs on carried interest balances and scenario analysis on distributions to improve their overall technology usage for private funds’ compensation. 

4. Transitioning to a Carried Interest and Compensation System is a Requirement to Address Items 1 – 3. 

To address the increasing complexity of allocation and incentive plans, software applications are necessary to store, calculate, and report employee compensation and carried interest allocation data. While spreadsheets offer familiarity, flexibility, and ease of use, they invite the risk of errors, inconsistencies, and functionality limitations. Many companies reach a breaking point when spreadsheets can no longer be the tool to effectively manage and report on compensation data, and they turn to systems to solve their challenges. 

There are varying degrees of system use, with natural phases to iterate over long-term desired functionality and reporting. Most firms begin with migrating carry allocations, vesting schedules, and carried interest reporting. After the foundation is laid, they add an employee portal, carried interest forecasting, co-investment tracking (from their core accounting), and base and bonus compensation to produce aggregated reporting and analytics. 


Private capital firms still have room to grow. But compensation and carried interest plans have reached a tipping point of complexity and operational burden, leading to improvements to the management of allocations. Companies are deploying better management analytics as well as more comprehensive statements and well-designed online portals for employees.  These improvements give employees and management “at-your-finger-tips” access to data as well as improved operational efficiencies. We at PFA are excited to be a part of this movement to help our clients improve their carry and compensation controls and reporting via the FirmView platform. 

PFA Solutions

Comprised of technologists with extensive experience in Private Capital Markets, PFA Solutions brings technical expertise and deep business acumen to every problem we solve. 


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