Review Your 2025 Compensation Performance

Before planning for 2026, understand what happened in 2025. Effective compensation planning starts with honest assessment.

Analyze What Worked (and What Didn't)

Retention metrics:

• Who stayed and who left?
• How did compensation factor into departure decisions?
• Were exits about money or poor value communication?

Performance outcomes:

• Did your comp structure drive desired behaviors?
• If you emphasized deal origination through bonuses, did sourcing increase?
• If you allocated carry based on value creation, did portfolio performance improve?

Budget execution:

• Where did you overspend or underspend, and why?
• Do variances reveal misalignment between philosophy and actual decisions?
• Are you consistently exceeding budget on discretionary bonuses?
• Did you underspend on carry allocations (creating future retention problems)?

Competitive positioning:

• When recruiting in 2025, how did your offers compare to competitors?
• Did you lose candidates to compensation?
• Did you win talent easily (suggesting room to optimize)?

Gather Critical Data Before Planning

You can't plan effectively without the right information:

• Individual performance assessments: Document each team member's deal contributions, value creation efforts, and qualitative contributions
• Current carry allocations and vesting schedules: Who has what percentage? When do vesting cliffs hit? What commitments need honoring?
• Market compensation benchmarks: Gather current data from Heidrick & Struggles, Glocap, and industry surveys on base salaries, bonus ranges, and carry allocations by role, fund size, and strategy
• LP feedback: Review comments from annual meetings on team quality, stability, and depth—LP perception directly impacts fundraising

Red Flags to Address Now

Certain warning signs demand immediate attention:

• Flight risks: High performers expressing dissatisfaction or entertaining outside offers require proactive retention strategies, not reactive counteroffers
• Compensation inequities: Gaps based on role, tenure, contribution, or demographic factors that don't reflect legitimate performance differences create cultural damage
• Overly complex structures: If your team can't explain their own compensation, the structure isn't working
• Broken promises: Honor commitments made in 2025—broken promises destroy trust and credibility

Strategic Compensation Decisions for 2026

With assessment complete, make the strategic decisions that will define your 2026 compensation approach.

Decision #1: Total Compensation Budget

Determine what you can afford:

• Most PE firms fund compensation primarily through management fees, though structures vary
• Some firms charge portfolio operations teams back to portfolio companies; others use hybrid models
• Understand your firm's approach and the constraints it creates

Framework considerations:

• Many firms allocate a percentage of management fee revenue to total compensation, though specific approaches vary by firm structure
• Balance current cash compensation with long-term carry allocation while maintaining financial sustainability
• Build contingency for mid-year adjustments, new hires, or retention situations—rigid budgets create problems when circumstances change

Decision #2: Compensation Philosophy and Mix

Define your compensation philosophy:

• Cash vs. carry ratio: What mix makes sense for your firm stage and fund performance?
  • Early-stage firms with less realized carry may emphasize cash compensation
  • Established firms with strong fund performance can lean more heavily on carry
• Base salary vs. bonus weighting: Higher base provides stability; larger bonuses create performance leverage
• Carried interest allocation strategy: Who receives carry, at what levels, and based on what criteria? This is your most powerful long-term retention and alignment tool
• Co-investment opportunities: Allow team members to invest personally alongside the fund to build wealth and alignment
  • Consider offering leverage on co-investment terms to further sweeten the opportunity and deepen commitment

Decision #3: Performance Metrics and Criteria

How will you evaluate performance?

Quantitative vs. qualitative balance:

• Deal-specific contributions vs. firm-wide value creation
• Investment professionals who source and execute deals deserve recognition
• So do those who improve portfolio performance, mentor juniors, or contribute to fundraising

Define your metrics:

• Quantitative: IRR, MOIC, deals closed, value created
• Qualitative: Leadership, mentorship, culture building
• The best firms reward both results and behaviors

Weight different roles appropriately:

• Investment professionals, operational partners, and fundraising leaders contribute differently
• Your compensation criteria should reflect those differences while maintaining fairness

Decision #4: Retention Priorities

Identify critical team members:

• People you absolutely cannot lose
• Not just top performers—also those with unique skills, relationships, or institutional knowledge that would be difficult to replace

Create meaningful retention incentives:

• Vesting schedules and cliff structures in carry allocations create "golden handcuffs"
• Favorable co-investment terms with extended vesting further bind key people to the firm
• Make departure financially painful

Be proactive, not reactive:

• Address flight risk before it becomes resignation
• If someone is vulnerable to recruitment, act preemptively with retention conversations, adjusted compensation, or expanded responsibilities
• Counteroffers rarely work—proactive retention does

Don't forget succession planning:

• Compensation decisions should support developing next-generation leaders, not just retaining current stars

The Year-End Compensation Planning Checklist

Strategy matters, but execution determines outcomes. Use this timeline to ensure nothing falls through the cracks.

☑ 4-6 Weeks Before Year-End

Strategic Planning

• [ ]  Review 2025 fund performance and distribution projections
• [ ]  Gather market compensation data (Heidrick & Struggles, Glocap benchmarks)
• [ ]  Conduct Managing Partner/Compensation Committee planning session
• [ ]  Set total 2026 compensation budget and allocation framework
• [ ]  Identify retention risks and critical roles

Operational Preparation

• [ ]  Audit current carry allocations and vesting schedules
• [ ]  Review employment agreements for contractual obligations
• [ ]  Validate carried interest calculations are accurate and ready to share
• [ ]  Prepare scenario models for different compensation structures
• [ ]  Coordinate with tax advisors on distribution timing (if relevant)

☑ 2-4 Weeks Before Year-End

Individual Compensation Decisions

• [ ]  Finalize individual performance assessments
• [ ]  Determine 2025 bonus amounts by team member
• [ ]  Set 2026 base salary adjustments
• [ ]  Allocate new carry grants or adjust existing allocations
• [ ]  Structure any special retention packages
• [ ]  Prepare offer letters for promotions or role changes

Communication Planning

• [ ]  Draft compensation communication talking points
• [ ]  Schedule one-on-one meetings with each team member
• [ ]  Prepare documentation: salary increase and bonus letters, new carry allocations and agreements
• [ ]  Align partnership on messaging and rationale
• [ ]  Plan for difficult conversations (below-expectation outcomes)

Systems and Documentation

• [ ]  Update compensation tracking systems with 2026 decisions
• [ ]  Generate carry waterfall projections to show team members
• [ ]  Ensure all documentation is legally reviewed
• [ ]  Prepare employee portal for updated compensation structure (if required), generate compensation statements

☑ Final Week of Year / Early January

Execution

• [ ]  Conduct compensation conversations with all team members
• [ ]  Deliver compensation statements
• [ ]  Process any year-end bonuses or distributions
• [ ]  Execute new carry allocation agreements with signatures
• [ ]  Update HR systems and payroll for January

Follow-Up

• [ ]  Address questions and concerns from team members
• [ ]  Document any verbal commitments or future considerations
• [ ]  Schedule Q1 check-ins for new performance expectations
• [ ]  Begin tracking retention and satisfaction post-communication

Compensation Structure Best Practices for 2026

Beyond the planning process, certain structural best practices help you design effective compensation.

Base Salary Considerations

• Market alignment: Base salaries should reflect market rates for roles at your fund size and strategy—gather competitive data to understand where you stand
• Geographic adjustments: Consider cost-of-living differences for remote team members, though many firms are moving toward location-agnostic compensation
• Emphasize variable comp: Keep base salaries competitive while emphasizing variable compensation—PE is a performance-driven industry

Bonus Structure Design

Structure options:

• Discretionary bonuses: Provide flexibility and allow you to reward behaviors that formulas miss
• Formulaic bonuses: Create clarity and reduce perceived favoritism
• Hybrid approaches: Many firms combine both for optimal results

Timing considerations:

• Year-end bonuses are standard
• Some firms use quarterly bonuses or deal-based bonuses for more immediate feedback and rewards

Clawback provisions:

• Should someone who leaves mid-year forfeit their bonus?
• Clear policies prevent disputes

Carried Interest Allocation

Allocation strategy:

• Most firms allocate a portion of total GP carry to the team, with the remainder going to founding partners or the management company
• Allocation varies by level and contribution
• Senior partners typically receive larger allocations than principals, who receive more than VPs and associates
• Contribution matters more than title—allocate based on value creation

Vesting creates retention:

• Multi-year vesting with cliffs ensures team members have a reason to stay
• Standard structures include four to five-year vesting with one-year cliffs

Define leaver provisions:

• What happens to unvested carry if someone leaves?
• Good leaver vs. bad leaver provisions
• Clear terms in carry agreements prevent disputes

Emerging Compensation Trends

• Co-investment rights: Increasingly important retention tools—allowing team members to invest personally builds wealth and deepens alignment with fund performance
• Phantom carry: Some firms use this for junior team members —provides economics without governance rights
• ESG-linked compensation: Emerging at impact-focused firms—if ESG is core to your strategy, consider reflecting it in compensation
• Transparency evolution: Younger professionals increasingly expect transparency about compensation structures, but total transparency creates challenges—find the right balance for your culture

The Complexity Trap: Why Simpler Compensation Structures Work Better

One of the most common—and damaging—compensation planning mistakes is overcomplicating structures. Complexity might feel sophisticated, but it undermines the core purpose of compensation: motivating and retaining talent.

When Complexity Obscures Value

Compensation only motivates if people understand it. A carry allocation with multiple tiers, complex vesting schedules, performance hurdles, and conditional provisions might be intellectually elegant, but if your VP can't explain their compensation to their spouse, it's not working.

Problems created by complexity:

1. Uncertainty replaces value: Team members don't feel appropriately rewarded when they don't understand their compensation, even if the economic value is substantial
2. Administrative burden increases: Every additional provision requires tracking, calculation, and communication—spreadsheets buckle under complexity, leading to errors that damage trust
3. Retention conversations become difficult: When a high performer considers leaving, you need to articulate clearly and quickly what they're giving up—complex structures make that conversation nearly impossible

The Importance of Team Members Understanding Their Compensation

The clarity test: The best compensation structures are simple enough for team members to internalize and explain. If someone asks a VP about their compensation, the answer should be clear: "My base is X, my bonus was Y, and I have Z% carry that vests over four years. Based on our fund performance, that carry is projected to be worth W."

Simplicity ≠ unsophisticated:

• You can have performance-based components, vesting schedules, and retention incentives while maintaining clarity
• The key is making sure each component has a clear purpose and is easy to explain

Benefits of understanding:

• Team members appreciate the full value of what they're receiving
• They understand what they'd forfeit by leaving
• They feel respected and trusted rather than confused and uncertain
• They make better career decisions

Using Tools to Model and Communicate Clearly

Even relatively simple compensation structures become complex at scale. When you're managing carry allocations across multiple team members, funds, and vesting schedules, manual tracking breaks down.

The role of purpose-built tools:

• Purpose-built tools like Navable help you maintain simplicity while managing complexity behind the scenes
• Instead of building increasingly elaborate spreadsheets, you can model different compensation scenarios, generate clear projections for team members, and track vesting schedules automatically

Keep complexity in your systems, not in understanding:

• The goal isn't eliminating all complexity—PE compensation is inherently complex
• The goal is keeping complexity in your systems, not in your team members' understanding
• Tools that provide clear visualizations of carry value, vesting schedules, and projected distributions help you communicate simply even when the underlying calculations are sophisticated

Technology and Tools for Compensation Planning

The right tools make compensation planning faster, more accurate, and more strategic.

The Spreadsheet Problem

Most PE firms start with Excel for compensation planning. It's familiar, flexible, and free. But spreadsheets break down quickly.

Why Excel fails at scale:

• Formula complexity: Complex carry allocations with multiple team members, funds, and vesting schedules create sprawling workbooks with hundreds of formulas
• Version control nightmares: During planning season, multiple people need to model scenarios—which version is current? Did someone's changes get saved? Did that formula get copied correctly?
• Error multiplication: When modeling multiple scenarios, change one assumption and you need to update dozens of cells—miss one, and your projections are wrong
• Manual documentation: Generating clean, professional compensation statements requires copying and pasting data into Word documents or PDFs, introducing more opportunities for errors and inconsistencies

During the high-pressure year-end planning period, errors are almost inevitable.

Purpose-Built Compensation Planning Solutions

Modern compensation planning requires purpose-built tools designed for PE carry and compensation complexity.

Key capabilities:

• Scenario modeling: Test different allocation approaches instantly—what if you gave your VP an additional 1% carry? What if you adjusted vesting schedules? Model unlimited scenarios without rebuilding spreadsheets
• Waterfall projections: Show team members the future value of their carry, not just percentages—a 2% carry allocation is abstract; a projection showing $500K in distributions over the next three years is tangible and motivating
• Documentation and audit trails: Track every decision and change—who approved this allocation? When was it modified? What was the rationale? These trails protect you during audits and disputes
• Integration: Connect with fund accounting systems to eliminate manual data entry and keep compensation planning tied to actual fund performance

How Navable Streamlines Year-End Planning

Navable is built specifically for PE compensation and carry management. During year-end planning, it solves the problems that make spreadsheets break down.

Key benefits:

• Model unlimited scenarios without errors: Change allocations, adjust vesting schedules, or test different performance assumptions instantly and see the impact across your entire team
• Generate individual carry statements: Instead of manually creating documents, Navable produces professional statements showing each team member's allocation, vesting schedule, and projected distributions based on fund performance
• Track vesting automatically: Navable maintains a complete record of who has what carry, when it vests, and what distributions they're entitled to—eliminating the manual tracking that creates errors
• Build trust through transparency: When team members can see their carry value clearly and understand how it grows over time, they appreciate the full value of their compensation and feel more connected to the firm's success

Communicating Compensation Decisions Effectively

Even perfect compensation decisions fail if communicated poorly. How you deliver the message matters as much as the message itself.

Preparing for One-on-One Conversations

Structure your approach:

1. Lead with appreciation and context: Acknowledge the team member's contributions before discussing numbers—explain the broader context of fund performance, budget constraints, and market conditions
2. Connect compensation to performance: Don't just announce numbers—explain why—what did this person do that drove their compensation? What behaviors or outcomes are you rewarding?
3. Explain carry value with projections, not just percentages: "You're receiving 2% carry" is less meaningful than "You're receiving 2% carry, which based on our current fund performance is projected to generate $400K in distributions over the next four years as investments realize"
4. Address questions with empathy: Compensation conversations are emotional—some people will be disappointed even with good outcomes—listen, acknowledge feelings, and explain your reasoning patiently

What to Include in Written Documentation

Comprehensive compensation statements should include:

• Total compensation breakdown: Base salary, bonus amount, and carry value with projections
• Vesting schedules and key dates: When does carry vest? When are distributions expected? Clear timelines help team members understand their economic future
• Performance expectations for 2026: Compensation conversations should launch forward-looking performance discussions, not just review the past
• Contingencies or future considerations: If you made commitments about mid-year reviews or future adjustments, document them

Handling Difficult Conversations

When compensation is below expectations:

• Lead with empathy but be clear about the reasons
• Vague explanations breed resentment; honest feedback—even when hard to hear—builds respect

Addressing performance issues:

• If someone's compensation reflects underperformance, explain what needs to change and how you'll support improvement

Retention conversations with flight risks: When you're worried about losing someone, transparency about their unvested carry can be your most powerful retention tool.

Navable's role in retention conversations:

• Show vested vs. unvested carry points and projected value
• Have data-driven retention conversations with concrete numbers
• Demonstrate what they'd be forfeiting by leaving
• Discuss whether topping up their allocation makes sense to strengthen retention

When someone asks for more:

• Manage up carefully
• Explain your constraints, acknowledge their perspective
• If appropriate, discuss what would need to change for you to revisit compensation mid-year

Building a Culture of Compensation Transparency

Find the right balance:

• Total transparency about individual compensation creates problems
• Transparency about process and philosophy builds trust

Consider group communication:

• Help the entire team understand how compensation decisions are made—even without disclosing individual details
• Transparency about process creates fairness

Remember: fairness ≠ equality:

• Different people contribute differently and should be compensated differently
• Fairness requires consistent criteria and transparent processes

Post-Communication: Monitoring and Adjustments

Compensation planning doesn't end with year-end conversations. Monitoring and adjustment continue throughout 2026.

Immediate Feedback Loop

Gauge team reaction:

• Pay attention to morale in the days and weeks after compensation communication
• Are people energized or deflated? Engaged or distant?

Address concerns quickly:

• Identify lingering dissatisfaction
• If someone is unhappy, address it before it festers

Be willing to course-correct:

• If you made a mistake or missed something important, fixing it quickly demonstrates integrity

Q1 2026 Check-Ins

Reinforce performance expectations:

• Schedule Q1 check-ins to connect compensation to performance expectations
• Compensation should drive performance—check-ins ensure alignment

Monitor retention risk:

• Are high performers suddenly less engaged?
• Are they taking calls from recruiters?
• Early warning signs let you act proactively

Address marketplace changes:

• If competitors make aggressive offers to your team or compensation markets shift significantly, be prepared to respond

Mid-Year Review Planning

Build in flexibility:

• Rigid compensation structures that can't respond to changing circumstances create problems
• Plan for potential mid-year adjustments

Conduct performance milestone check-ins:

• If someone's performance improves dramatically or deteriorates significantly, mid-year adjustments may be appropriate

Recalibrate to market conditions:

• If fund performance exceeds expectations or market compensation shifts, consider mid-year adjustments

Documenting for Next Year

Capture lessons learned:

• What worked in your 2026 planning process and what didn't?
• Lessons learned now will make 2027 planning smoother

Document process improvements:

• Did you start too late?
• Was communication unclear?
• Did your tools create bottlenecks?
• Fix these issues for next year

Build institutional knowledge:

• Compensation planning shouldn't depend entirely on one person's memory and judgment
• Document processes, criteria, and rationale to create organizational capability

Conclusion

Compensation planning is strategic, not administrative. The decisions you make this December will shape your firm's performance, culture, and team stability throughout 2026.

Getting it right creates alignment:

• Your team understands what they're working toward
• People feel valued for their contributions
• They have powerful reasons to stay and perform

Getting it wrong creates problems:

• Q1 departures disrupt deals and relationships
• Unclear compensation structures leave people confused rather than motivated
• Poor communication damages trust that takes years to rebuild

The best Managing Partners:

• Start early
• Communicate clearly
• Use proper tools
• Treat compensation planning as the strategic priority it is, not a year-end administrative task to rush through

Use this checklist to execute compensation planning with confidence. Your decisions matter—make them count.