Is this the end of the private equity pay model?

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When KKR announced its 2008 annual results this week, it wasn't pretty: it made a $1.2bn annual pre-tax loss, following last year's $815m pre-tax profit.

There are signs that the dramatic decline in performance is taking its toll on pay.

In normal circumstances, private equity executives receive a base salary, a bonus, and carried interest. Carried interest normally equates to 20% of a fund's profits above a specified hurdle rate and is dispersed between its senior executives.

However, KKR has waived carried interest and its management fee on a new fund designed to prop up its ailing investments. It also accepted reduced carry and a lower management fee on an infrastructure fund launched by earlier this year.

Private equity headhunters say the pressure on pay isn't restricted to KKR. Returns on most existing funds are below the hurdle rate, making carry payments unlikely for the foreseeable future.

"Almost all funds are underwater at this point. People are not getting much, if any, carried interest and there is no immediate known timescale for that scheme of remuneration to work again," says the head of one private equity-focused search firm.

As a result, David Howell, managing director of EM Financial Services, says private equity pay is being re-configured. "Now that capital gains tax has increased to 18% it's no longer as tax efficient as it was. Funds are following banks and increasing basic salaries or going for a slightly larger bonus."

Howell says a post-MBA level associate in a private equity fund can expect a salary of 80-90k, plus an equivalent bonus. But other headhunters say this is too optimistic and that associate salaries are more likely to be 55-65k, plus comparable bonus.

If poor performance is squeezing carried interest payments, pressure for lower management fees may yet put a stop to increases in base and bonuses. John Moulton, managing partner of Alchemy, says management fees on large funds have been "unnecessarily high" at 2%. "

"For large funds over 1bn, 1% is generous. Alchemy has an annual budgeted fee which has worked out at 90bps and we have adequate lifestyles," he says.