Wall Street pay is headed for change as more firms embrace alternative assets: Report

BlackRock and Goldman Sachs have begun compensating some top executives with carried interest, traditionally a private equity compensation model, to incentivize growth in alternative assets and compete for talent. A Johnson Associates report predicts this trend will expand across Wall Street as firms increasingly focus on private markets, with BlackRock citing alignment with its private markets platform and Goldman Sachs emphasizing talent retention as key drivers for the change. This shift signals a blurring of lines between public and private markets compensation structures, potentially impacting executive pay across the financial services industry.

Analysis

Leading financial institutions BlackRock (BLK) and Goldman Sachs (GS) are increasingly adopting private equity-style compensation, specifically carried interest, for their top executives, a strategic shift identified by a Johnson Associates report as an emerging trend across Wall Street. This move is driven by the significant growth in demand for private assets and the desire for traditional firms to signal their commitment to expanding their alternatives businesses; for instance, BlackRock, with $12 trillion in AUM, is diversifying into real estate and infrastructure and introduced a carried interest component for CEO Larry Fink for the first time in 2023 to align with its private markets platform evolution. Similarly, Goldman Sachs implemented carry for CEO David Solomon and other C-suite executives, citing the need to compete for talent with dedicated alternative asset managers. Previously reserved for professionals directly involved in private markets investing at these firms, the extension of carried interest to top leadership underscores the blurring lines between public and private market compensation structures and is anticipated by Johnson Associates to become more prevalent as firms prioritize growth in alternatives, not being limited to just BlackRock and Goldman Sachs.

Key Decisions for Investors

• Investors should view the adoption of carried interest by BlackRock and Goldman Sachs as a strategic initiative to enhance their competitiveness and growth in the lucrative alternative assets sector, potentially leading to increased AUM and fee revenue from these operations.
• Consider monitoring the broader adoption of such compensation models across other investment banks and traditional asset managers, as this could indicate a significant industry-wide strategic pivot and intensified competition for talent specializing in private markets.
• Evaluate how this shift in executive compensation, aimed at incentivizing long-term performance in private market investments, might influence the risk appetite and capital allocation strategies of these firms, and subsequently, overall shareholder returns.