KKR has changed its compensation structure to include a higher variable component, which the firm feels will enhance transparency around how the compensation pool is formed.
The structure will also be better aligned with the realised investment performance of its funds, KKR’s chief financial officer, Robert Lewin, said in an earnings call on 9 February.
“It will also create better alignment, as compensation at KKR will become even more success based and aligned with the realized investment performance of our funds,” Lewin said.
The compensation structure has been divided into three components and drawn from its management fee, carried interest and realised investment income from its balance sheet.
Specifically, around 20-25% of its management fee would go into the compensation pool. Around 60-70% of the compensation paid out to employees will come from realised performance revenue -- mostly carried interest based on exits.
The compensation pool will also draw around 10-20% of the realised investment income from KKR's balance sheet.
“We think this change is advantageous for both our public shareholders, as well as our fund limited partners,” Lewin said.
KKR has historically said that its compensation is a percentage of its distributed earnings. This number is the low 40s, the firm said.
For 2020, KKR’s compensation margin was 38.7 of its distributed earnings.
The change adds a “bit more variability in our compensation margin based on our performance,” Lewin said.
KKR expects the compensation margin to be higher in the years when the firm sees an elevated level of exits.
“But in a more challenging environment where our monetisation is lower, you should also expect to see our comp margins go down, which will provide some level of added protection to our operating earnings,” Lewin said.
The firm said this structure is more likely to impact the senior employees, mostly partners, who are also shareholders in the firm.
KKR said it feels more confident about making this shift in compensation structure based on the growth of its management fee earned in recent years, which can cushion the firm in the years when monetisation of assets is difficult.
The increased fee income was in part aided by the acquisition of Global Atlantic Financial Group, which closed on February 1. The acquisition helped KKR increases its assets under management (AUM) by 36% to $342 billion.
“Our senior employees are all big shareholders of KKR and we think that this is certainly a benefit to our shareholders. We think our senior employees are also more used to more variability and their annual compensation based on performance,” Lewin said.
The firm said its earnings rose 15% year-on-year in the fourth quarter, driven by growth in management and transaction fees from its capital markets business, as reported.