In this solo‑host episode, Bridger Pennington explains why aligning incentives is essential for fund managers and walks through practical ways to structure compensation for employees, contractors, business partners, and investors. He begins by criticizing hourly wages as inherently misaligned, then advocates revenue‑share and commission models that let pay grow with performance. He cites Jack Welch’s 15% promotion/15% termination system as a blueprint for performance‑based compensation and describes his own shift from entrepreneur to CEO, emphasizing the need for robust systems to support incentive alignment. A concrete case study shows how he restructured a YouTube content hire’s pay from a flat retainer to a tiered performance matrix. Pennington then turns to fund economics, detailing a waterfall fee structure (2% management fee, 8% hurdle, 80/20 split up to 20% IRR, then 50/50 above 20% IRR) and stresses full disclosure of ancillary fees. He outlines how to give employees GP or bonus stakes tied to fund IRR thresholds (15%, 19%, 25%) to ensure everyone pursues the same return goal. The episode concludes with a call to action to explore more content and contact him via Instagram.
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Hey guys, welcome back to the show. So today we're going to talk about aligning incentives for employees, contractors, business partners, and your investors when running a fund. Aligning incentives is one of the most important things you can do as a fund manager. Now, we just hit 100 episodes, by the way, just barely, which is awesome. So if you guys have subscribed or like or whatever you want to do on this video or check out our YouTube channel, we have a lot of playlists on there which are, I think, pretty good. We go through private equity hedge funds, real estate funds, all that kind of stuff. So now today I want to talk about hiring people, incentivizing In the last month and a half throughout coronavirus, we have hired, I think, 6 new people to our teams. Like 6 new roles and positions have opened up and we've hired to our teams. It's pretty fun. It's pretty fun to hire and bring people on. Now, the question always comes up and me and my partner actually were talking about this the other day is how do you incentivize people correctly? And one of the things I absolutely hate in business is the hourly rate, the hourly wage, because that is totally misaligning incentives. Have you guys ever hired a lawyer and you hire them to do a job and they say, yeah, it's, you know, it's a $200 hourly rate. You go, what kind of rate is that? That is incentivizing my lawyer to work slow. I want a job done quickly and I am paying him to work slow. Same with employees. I absolutely hate having employees on an hourly rate or contractors. Oh, it's $15 an hour or $10 an hour or whatever it is because they're incentivized to do their jobs slow or ineffectively. So I know some of our employees are on a 15-hourly rate, but I like to very quickly transition them off of that onto some type of revenue share or some type of commission. Where they can grow with as well as they perform. I love a book from Jack Welch. If you guys have heard of Jack Welch, a book called Winning. So Jack Welch was one of the former CEOs of GE, General Electric, and he was— I've heard stories about Jack Welch as a young guy. I mean, in his 20s, was very impressive. People would meet him and he would ask so many questions about a business. I remember one interaction, somebody told me he met with this other CEO who's running a business He's like, who's this young kid thinks he can come in here and ask? And he spent an entire 8-hour day with this one other CEO of a different business. He said, after that experience, I knew more about my own business because— and I think he's like, I think Jack knew more about my own business than I did because of how many questions he asked and how piercing those questions were. Anyways, people look to him as an incredible manager of a business. And one of the things Jack did and GE is famous for, they would hire a lot of people and they every year would say, hey, this year we are going to promote— I don't know the exact numbers, I know they've changed over time but it was somewhere around we would promote 15%, we would fire 15% and we would keep 70% kind of in the middle and he told everybody this. 15% of you are going to get fired this year, and a little bit cutthroat of a business but he did it and he said, guys, I would not like to work in a job where if I excelled, I didn't get compensated. And I don't want you to work in a job you don't have the same opportunity. So I want to compensate people that are performing well, and I want to align incentives and help people that are— if you're performing well, you're going to get promoted very quickly in this company. And if you're not performing well, you're fired. We're not here to give away freebies, right? This is a business. We're trying to make money. And I actually, I really love that concept. And that's something we've tried to put into our teams. Now we're just growing. This last 2 months, we've actually had to, I feel like, slow down our building and business development and getting new clients and contracts and all these things. To just build the systems to handle the growth that we have. We had to almost slow the business down a little bit to build the systems up so that we can compensate for the growth. So this last month's been a lot of system building and a lot of team building, and sometimes a person is a system. You guys have heard me say this before, but entrepreneurs are in the business of building a great dream and a vision. CEOs are in the business of systems. And my transition from an entrepreneur to a CEO is I've got to get a lot better at building systems and teams. And it's funny, you look at big companies, a lot of these CEOs They focus on the vision. They focus on the vision, goals, the plans of the company, and they focus on systems, the systems around them that run, and they just make sure all the systems are running right. So we're in the process of trying to transition. That's gonna be a long process, but making sure our employees have aligned incentives are crucial. So we've been— a lot of employees have, and our contractors have been putting them on rev shares, or if you do X, you get X return. For example, I had another guy— by the way, we're gonna get into funds in just a second, doing this with investors— but I just had a guy we hired for YouTube content. And great guy, we brought him on about a couple weeks ago and he said, Bridger, I've got a flat rate of X dollars per month. I don't know a ton about YouTube, right? He's like, we should get on YouTube. I was like, okay, we probably should be on YouTube. We mainly focus on the podcast here but now we're on YouTube, right? And we've always been on YouTube but to actually scale and really make sure we're taking over keywords and doing very well on YouTube. So, he looked great, I said, this is awesome. He said, hey, I have a monthly rate, this is what it is, and I said, well, that's not exciting. What incentives do you have to go over the top and perform for my business? Almost none, and so what we did, I said, hey, your monthly rate is X. Like, let's call it right here, and let's call it $1,000, okay? $1,000 a month right here. I said, hey, I'm gonna pay you $500 a month. However, if you perform and get us, you know, a certain number of subscribers and metrics, you can earn way more than $1,000 a month. You could earn $1,500, $2,000, even $3,000 a month if you hit certain metrics, and we built out this matrix, and we presented it to him and said, hey, I don't want to pay people on a retainer. To do something for me. I want you to be incentivized to crush it with our business, and he actually said yes. He said, I love it, I want to do it, and I firmly believe in doing that. So now, transitioning to funds, right? You guys are all thinking about starting a fund. How do I do this inside of a fund? You want the same thing to happen with investors and a fund manager. So imagine if you're investing in a fund and that fund manager is not incentivized to get you high returns. See, whether they get you, the investor, a 4% return or a 37% return, they make the same amount of money. How incentivized are they to go the extra mile and get you a 37% return? Not very. And they take their management fee of, let's call it 2%, and they're happy. They're like, yeah, you know, sorry, we had a down quarter this quarter and, you know, you got 4%, but I still took a 2% management fee. I absolutely hate that. I don't know how any investor goes into that situation and likes that situation. That's why most funds are set up on this waterfall structure we've talked about before. And my funds right now, and I was just starting out, I didn't have this great tracker. I said, you know, Mrs. Investor or Mr. Investor, I don't make any money Unless you make at least 8% first. And then above that, that's when I start taking in carried interest and a performance fee. And I said, the more money the fund makes, the higher your return is, the higher my return is. And see, our incentives are aligned correctly of we both want the same things. Now, other things will happen inside of funds where the fund manager will make money on commissions from other places, or they have a management company that manages the properties, they make management fees from there, and they grab all these little fees By the way, which you should disclose, always overdisclose to investors. And sometimes you are not as incentivized to get an investor a very high return. And that's why I really hate a lot of the Wall Street type of funds out there. And obviously they do great already, but for a startup fund manager to go out and copy what they're doing just doesn't work. That's why we always fight the Wall Street bros or the finance bros who think they can do it that way. It just doesn't work because investors want us to align incentives. With them. We all want that. We're all going after the same goal and the same opportunity. So in my funds, I say, hey, I split with you guys 80/20 until we get a 20% return. And if we get above a 20% IRR, I get a 50/50 split. I'm even more incentivized to get above a 20% IRR because that's when I as the fund manager start making a lot of money and investors love that. So whether it's employees, whether it's contractors, whether it's your investors and your fund, align incentives. A lot of fund managers and like mine will give their employees— A part of the general partner or a piece of the performance of the fund, which helps align the incentives of your employees. You want all your employees focusing on that same goal of getting a high return. So, a lot of funds will say, hey, employees, if we get above a 15% return, you all get this, you know, X amount of bonus. And if we get above 19%, you get a bonus. And if we hit 25% IRR in our fund, you guys get this huge Christmas bonus at the end of the year. And you put it out there and your employees, you say, guys, we're working for that 25% IRR. Let's all go after that goal. And now all your employees, your VPs, your president, whoever, is all incentivized to hit that 25% IRR. It's not just a nice goal. Goals are really nice, right? You set a goal. Let's, you know, let's do this. It's a lot more nice when there are financial incentives behind hitting that goal. And that's what we have to do as a fund manager to align incentives with employees, contractors, investors, and everybody to that one central goal and make sure they know how they're going to get paid. When you reach that goal. So hopefully that helped. If you guys wanna learn more, click the link below, hit our other episodes. We have actually playlists on our YouTube channel you guys can check out. And let me know if you have any questions. Hit me up on Instagram, it's a great place to go to find me. So I will see you guys in the next episode. Peace.
