Why is the cost of hiring spiralling in Private Equity in a candidate-driven market?

What are the issues currently occupying the minds of senior reward professionals in Private Equity?

Eton Bridge Partners had the pleasure of hosting a gathering of professionals specialising in this field. Here, we present the main findings of a wide-ranging discussion.

Inflation is currently a major concern across society – and one particular variety is causing a massive headache for Private Equity organisations when it comes to recruiting junior staff for financial roles. American banks, concerned over a shortage of qualified potential employees, have driven up the cost of hiring analysts which has had a knock-on effect on the UK talent pool.

There appear to be several reasons for the perceived lack of junior analysts. One is the attraction of competing sectors, such as technology, and another is the negative publicity around the treatment of staff by investment banks. Finance, in general, has had a severe reputational hit and people coming through universities now have access to a wider range of options.

This has led to concerns over talent retention, which has in turn had a snowball effect on the cost of recruitment.

A related factor, certainly in the US, is that several states and local governments are increasingly adopting laws and regulations that prohibit employers from requesting salary history information from job applicants. Recruiters and reward departments looking for a quick hire are immediately making their ‘best offer’ in order to prevent that candidate from going to another employer rather than going through a longer selection process.

Younger generation’s attitudes help to create a candidate-driven market

Candidates from the younger generation are more open than their elders when it comes to talking about the level of salaries to which they aspire. People are arriving for interviews with virtually no experience – but extremely high expectations.

One result of firms having to pay higher compensation is because of  the resulting compensation for the year group in question which pushes up close to the packages enjoyed by the level above which can mean the salary bandings flatten. Differentiating between them can become a serious issue internally.

The combination of the heightened aspirations of the younger generation, the Great Resignation, and the general pressure of inflation (and its impact on the cost of living) have contributed to the development of a candidate-driven market that ensures teams working in reward are facing serious challenges around recruitment and retention.

Flexibility and cultural fit are key factors for success

Of course, financial compensation is not the only reason why people accept an offer for a particular position – the cultural fit remains a key consideration.

One crucial aspect of company culture is the new era of flexibility that has arisen as a result of the Covid-19 pandemic. Some firms lost large numbers of employees as soon as they were asked to return to the office even for one day a week.

Any business that demands their people are in the office five days a week in the post-Covid world will struggle to attract new employees. The consensus is that in most workplaces, people are expected to attend the office three times a week; giving people the flexibility to make this work for them is preferable.

The concept of ‘Digital Monday’ and ‘Digital Friday’ is a popular option, as is ‘Remote August’. As long as the work required is completed, companies are happy for their people to operate remotely – even in a different time zone, over the summer period which is something that isn’t currently being seen in many of the Banking firms

Managers have had to learn to interact differently with their teams and build a more understanding relationship, which in turn highlights the importance of creating and nurturing a culture. This encourages people to deliver their best work and improve the results of any business.

Incentivisation derails the push for alignment

Benchmarking is a perennial issue for reward operatives in Private Equity. With complex business structures comes a variety of compensation schemes, each – with a demand for long-term incentive (LTI) plans for all the different areas. Once you add in localised and individual incentives, you can end up with dozens of different LTIs.

Consolidation may be the answer, but it is easier said than done, not least when you have to factor in the territorial instincts of people in various areas. Businesses may aspire to alignment – but in the absence of reliable benchmarking across marketplaces, that is a concept that remains elusive.

One extra layer of complication is added by the way different companies use titles to compensate employees they fear might be tempted to leave. Bolting the word “senior” onto their existing title might persuade them to stay – but it adds inconsistency and complexity to the reward structure.

Our conclusion

There has been a flurry of activity within the Private Equity sector since the pandemic, and both attraction and retention remains a challenge for HR. Reward professionals are doing what they can to come up with creative ways to secure talent from the competition, however, it is clear that there isn’t a one size fits all approach.

Interestingly, specialist reward talent within PE is also limited, with some remuneration responsibilities and management of carry plans still lying with Finance, whilst other reward projects are being outsourced to consultancy firms.

If businesses want to hire the best talent in the market, then they’re going to need to ensure that they have a market leading, and commercial reward strategy.

Whilst the above points were the key focus areas of our discussion, it was clear that the conversation could have continued and that PE businesses are facing several people challenges in the post-Covid world.