Documenting pay

A company ticker on a public stock exchange brings with it top-down access into a firm’s operations and management. Alternative assets heavyweight The Blackstone Group was recently reminded of this when US securities regulators took an interest in the compensation packages of its senior executives.

More specifically the Securities and Exchange Commission sought Blackstone’s clarity earlier this year over how its chief executive Steve Schwarzman determines the annual pay packages of his top lieutenants. He alone holds veto power over senior executive’s carried interest allocations, cash payments and equity awards, according to the group’s latest annual report filing with the SEC.

In questioning Blackstone over senior pay, the agency demonstrated a curiosity into the one-man compensation committee approach, presumably for investor protection reasons relating to risk. The fact that a firm’s head could in any year recalibrate a GP’s economic interest in a fund, in effect compromising their incentive to perform at a high-level, is beyond many retail investors’ due diligence. Blackstone in a reply letter to the SEC said it would disclose greater detail over executive compensation in future filings.

The SEC’s interest in private equity compensation schemes however goes beyond listed firms.Earlier this year the agency put forth a proposal under which investment advisors managing at least $1 billion in assets would have to prove to regulators their executives aren’t being compensated in a way that encourages excessive risk taking. Should the proposal come to fruition, fund managers operating under remuneration setups similar to Blackstone – about half of independent buyout firms are thought to follow this model, according to Dow Jones – may want to therefore prepare a consistent methodology which explains how a firm founder reaches decisions over pay.

Regulators’ attention to compensation practices isn’t likely to go away anytime soon. Europe has already begun crafting rules around managers’ pay via the Alternative Investment Fund Managers directive and it wouldn’t be far-fetched to think the US is watching closely to see whether it might consider similar measures.