Tying Fund Manager Compensation to Impact

In a typical private equity fund, a general partner’s financial compensation is linked to the fund’s financial performance in the form of a carried interest – a percentage of the earnings of the fund. In the context of impact investing, a fund manager promises both financial and social returns, yet compensation is still traditionally tied only to financial performance.

This traditional compensation structure leaves out financial incentives for the general partner and fund manager to meet the fund’s stated social impact objectives. 

In this issue brief, we explore the reasons for tying compensation to impact and showcase how a few pioneering funds have done it.