Private Equity Compensation Trends Challenge Investment Banks Amid Talent War

Key Takeaway

• Harvey Schwartz of Carlyle Group outearns Goldman Sachs' David Solomon with $217 million vs. $189 million, highlighting private equity's higher compensation.
• Schwartz's package includes a $180 million five-year stock incentive, emphasizing long-term performance and alignment with investor interests.
• The trend reflects private equity's ability to attract talent with lucrative packages, challenging investment banks amid a "war for talent."

Executive Compensation Trends

The financial industry is witnessing a notable divergence in compensation trends between investment banks and private equity firms. David Solomon, CEO of Goldman Sachs Group Inc., and Harvey Schwartz, CEO of Carlyle Group Inc., exemplify this shift. Solomon, despite declining an offer from Carlyle, has earned a total of $189 million over six years at Goldman Sachs. In contrast, Schwartz, after a hiatus from Goldman, joined Carlyle and secured compensation packages totaling $217 million since last year. This disparity highlights the broader trend of private equity firms offering significantly larger pay packages compared to their investment banking counterparts, driven by the ability to meet long-term performance targets.

Private Equity's Lucrative Offers

The compensation packages in private equity, particularly at Carlyle, are structured to align executives' interests with those of investors, emphasizing long-term share performance and fund success. Schwartz's pay package at Carlyle, for instance, includes a five-year stock incentive valued at $180 million, contingent on share price improvement and tenure, with an additional $30 million in equity-linked awards added later. This approach is not unique to Carlyle; other firms like KKR and Apollo have also structured substantial incentive packages for their leaders, potentially worth over a billion dollars in KKR's case, if performance targets are met.

Goldman Sachs vs. Carlyle Group

While Solomon's compensation at Goldman Sachs has ranged between $17.5 million and $35 million annually, supplemented by carried interest from investment vehicles, the growth in his wealth has been steady, with Goldman's stock climbing over 80%. In contrast, Schwartz's potential earnings at Carlyle hinge on ambitious performance metrics, including doubling the stock price within five years. Despite Carlyle's smaller market value and its stock's underperformance relative to peers, the firm's compensation strategy reflects a strong belief in rewarding executives for long-term success and alignment with shareholder interests.

Industry Dynamics and Challenges

The disparity in executive compensation between investment banks and private equity firms underscores a broader industry trend where private equity is increasingly able to attract top talent with lucrative pay packages. This shift has caused concern within investment banks, as evidenced by Goldman Sachs' response to the "rapidly increasing war for talent" with special one-time awards for Solomon and other executives. However, this strategy faces criticism, as highlighted by a recent "F" grade from proxy adviser Glass Lewis for Goldman's executive-pay plan, citing a disconnect between pay and performance.