Family-office pay turns formal as incentive plans spread

The handshake is giving way to the employment contract in family offices. A report from Morgan Stanley Private Wealth Management and Botoff Consulting, covered by CNBC's Inside Wealth newsletter, finds a majority of family offices now use long-term incentive compensation plans, which boost pay based on performance and returns. Among investment-focused offices, nearly two-thirds do. Valerie Wong Fountain, Morgan Stanley's head of family office resources, told CNBC that years ago handshake agreements were common; today plans are structured and measured against performance.

Pay at investment-focused offices tracks the institutional work. Median total CEO compensation there is $825,000 a year. At offices with more than $1 billion in assets, the median CEO takes home over $1.2 million, while average pay at that top tier exceeds $3 million. CIOs at investment-focused offices have a $900,000 median and a $1.8 million average. Carried interest, phantom equity, profit sharing and deferred plans ride on top of base salaries.

Co-investment is the especially popular piece. Executives can put their own capital into the same transactions the family executes, and since families often get special access to fast-growing companies, the right carries value beyond the dollars involved. The report puts 85% of co-investments in the executive-funded category; only a minority involve loans from the family. "It's a powerful way to eat your own cooking," Fountain said.

Formal plans give families something besides a recruiting edge: a yardstick. When pay moves with measured performance, the employment contract can support decisions a handshake could not. In a market where top family-office talent is scarce, the old ways are becoming a holdover.