Impact

Considerations,
Design Options

Linked
and Frameworks

Compensation
Table of contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Report Objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Key Takeaways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exploring Impact Linked Compensation Options . . . . . . . 11

Decision Making Framework. . . . . . . . . . . . . . . . . . . . . . . . . . 14

Mechanism Decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Choosing a model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Deciding what is at stake. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Operationalizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Yardstick Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Selecting Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Setting Targets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Getting to the portfolio level (or not!) . . . . . . . . . . . . . . . . 29

Governance Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Designing Structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Assigning Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . 37

Perverse Incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Fund Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Future Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
acknowledgements
This report was written by:
Aunnie Patton Power Riannah Burns
Lead Researcher and Impact Fellow, The ImPact Research Assistant

Peter Chakaniza Juan Jardon Pina

Project Manager and Research Assistant Research Assistant

For their guidance, support and contributions as key advisors for this report we are grateful to:
Ellen Carey Maginnis Karim Harji
Impact Measurement and Management Consultant Programme Director
Oxford Impact Measurement Programme
Anne Tucker Said Business School, University of Oxford
Professor of Law
Georgia State University College of Law

We are thankful for the help from our ecosystem collaborators on this project:
60 Decibels, Align Impact, Bluemark, Catalyze, Center for Sustainable Finance and Private Wealth,
Catalyze, elea Center for Social Innovation - IMD, EVPA, the Global Steering Group, Impact Capital
Managers, Impact Frontiers, Phenix Capital Group, RPCK, Roots of Impact, Social Finance, Sustainable
Capital Group, The Predistribution Initiative, Tiedemann Advisors, and Toniic.

We’d also like to thank:

Mike McCreless, Tom Adams, Christina Leijonhufvud, Tristan Hackett, Michael Belles, Brendan Cosgrove,
Diane Kulju, Chintan Panchal, Aaron Bourke, Catherine Dun Rappaport, Patrick Reichert, and Jessica
Hart for their incredibly valuable input.
Lastly, we would like to thank all our research participants for making this report possible and a special
thank you to all the organizations that were willing to be used as cases for the report (please see appendix
for a full list of organizations).
The Impact Linked Compensation Project was graciously funded by the Tipping Point Fund on Impact
Investing and hosted by The ImPact.

Design by: Daniel Yu

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 3

Introduction
Impact investors are united by intentionality: the explicit pursuit of positive, measurable social and
environmental impact alongside financial returns. To turn intentions into reality, funds need to under-
stand their investments’ impact on people and the planet, and then work to increase the positive
effects and decrease the negative effects.

To do this, impact investors formally integrate This limited uptake means that the vast majority of
impact into investment processes and decision- impact funds in the market still use “financial only”
making, portfolio management, and exits, thus set- compensation structures. Yet, one recent study
ting themselves apart from traditional investors. of 53 impact investment funds found that com-
mercial terms such as hurdle, carry percentage
As the industry has developed, limited partners
and catch-up targets vary more in impact funds
(LPs) and general partners (GPs) (also referred to
than in traditional funds (Geczy et al., 2021). It is
as fund managers) focused on impact have looked
therefore clear that impact managers and inves-
for additional ways to reinforce the impact inten-
tors are making deliberate choices about the vari-
tionality of their capital. The compensation of
ous elements of manager compensation, in ways
individuals and organizations has been routinely
that may already differ from mainstream funds.
discussed as one option.
That the majority of impact fund managers are
Impact linked compensation (ILC), a process of not being rewarded or incentivized for the impact
tying fund manager compensation to impact per- they intend to create implies that the market sees
formance, is a tool that seeks to reinforce impact financial success as a proxy for impact achieved.
commitments through incentive alignment. ILC Lack of impact linked compensation suggests a
aligns incentives by tying a managers’ financial misalignment between incentives and intentions.
rewards to achievement of the fund’s impact
The topic of alignment in compensation is not
goals. ILC structures have an additional benefit:
unique to impact investing. Nearly three-quarters
they encourage funds to develop aligned impact
of S&P 500 companies now tie executive com-
measurement and management (IMM) practices to
pensation to some form of ESG performance (The
implement and oversee the ILC, reinforcing the link
Conference Board, 2022). Reward Value, a research
between intentionality and performance.
initiative and foundation that focuses on execu-
The Global Impact Investing Network (GIIN) tive pay, developed the Principles of Responsible
released its seminal issue brief on Impact-Linked Remuneration, which suggest compensation should
Incentive Structures in 2011. This brief found that reward realized long-term performance for both
well-designed and implemented impact linked financial and non-financial aspects (2022). Reward
compensation structures could be an effective way Value’s model of compensation has three parts: a
to motivate GPs to achieve their intended impact yardstick to measure, a remuneration mechanism to
goals, but uptake would depend on LP demand and link performance to pay, and governance to ensure
the willingness of GPs. Industry interest has been the mechanism meets the intentions.
sustained over time: the Stanford Social Innovation
The initiative suggests that an appropriate yardstick
Review published “Aligning Interests in Impact
is one that measures both realized and sustained
Investing” in 2013, and Transform Finance Investor
performance, and that compensation models
Network (TFIN) released its issue brief “Tying Fund
require strong governance to manage the relative
Manager Compensation to Impact Outcomes”
nature of performance, including exploration of
in 2016. Yet there remains limited uptake: in
the extent to which stakeholders or beneficiaries
Bluemark’s 2023 report “Making the Mark”, 31%
should be included in the assessment of perfor-
of verified investors linked impact performance
mance (Reward Value, 2022). The wrong yardstick, a
directly to financial incentives.
poorly designed mechanism, or a lack of appropriate

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 4

governance could each create perverse incen- In our summer 2023 survey of over 200 LPs,
tives or “mission drift” that leads to poor impact GPs and intermediaries, 51% of GP respondents
performance (Ebrahim et al., 2014; Jones, 2016). reported that they had implemented ILC, with
These challenges of ILC implementation, including 48% of the GP respondents reporting implemen-
perverse incentives, have been addressed in most tation in just the last two years. Thus, readers
media coverage of the concept, and in a recent should consider this report a collection of first-
study by Thirion et al. (2022), which identified and generation ILC data. While the field continues to
described the tensions faced by fund managers grow and evolve, rich lessons are already emerg-
who structure and implement ILC, including cost- ing in planning, structuring, and implementing
reliability tradeoffs in impact management. ILC mechanisms.
Although the impact investing field is still in the early As such, this report is not a recommendation to
stages of implementing ILC, the concept is increas- use ILC, nor is it an assessment of best practices.
ingly represented in industry standards and regula- Rather, this report sets out a range of consider-
tory guidance. Emerging standards such as the SDG ations to help fund managers contemplate ILC
Impact Standards outline requirements related to in light of their unique fund structures, portfolio
impact objectives and compensation, for example, compositions, target impacts, relationships with
fund managers should “align [financial] incentive asset owners, and other circumstances. The
mechanisms with the fund’s purpose and strat- report will highlight:
egy”. Similarly, the Operating Principles for Impact • A framework for understanding the
Management include “aligning staff incentive systems considerations that underpin the design of an
with the achievement of impact” as a way to serve impact linked compensation structure
principle two: strategic impact on a portfolio basis.
• A spectrum of design options, illustrated by a
And in the EU, the Sustainable Finance Disclosure
range of examples from practice, and
Regulation (SFDR) requires funds to disclose how
their fund’s compensation policies are “consistent • A range of future-oriented questions and
with the integration of sustainability risks”.1 considerations that LPs/GPs/the sector will need
to address as impact linked compensation evolves.
The impact investing market has grown significantly
since the GIIN first published its 2011 issue brief on
impact-linked incentives. The latest estimates are Core Definitions
now over US$1 trillion in assets under management
(GIIN, 2022). As the industry has grown, concerns • Impact is a change in an outcome
about impact-washing have gained prominence: caused by an organization. An impact
66% of investors cite it as the biggest issue facing can be positive or negative, intended
the industry in the next few years (GIIN, 2020). In or unintended.
the GIIN’s Roadmap to the Future of Impact Investing
• An outcome is the level of well-being
(2018), aligning manager incentives with impact is
experienced by a group of people, or the
one of 18 key actions required for the impact invest-
condition of the natural environment, as
ing industry to achieve its collective vision. The GIIN
proposes that impact-linked incentives will increase a result of an event or action.
both demand and accountability for impact. • Impact management is the process of
identifying the positive and negative
Report Objectives
impacts that an enterprise has on
Any effort or initiative to improve the impact invest-
ment discipline, including introducing ILC, should
people and the planet, and then
be considered in light of the field’s overarching reducing the negative and increasing
goal: directing more capital to the achievement of the positive.3
more and better positive impacts.

2 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability related disclosures in the
financial services sector” (2019) Official Journal L317, p. 10.
3 https://impactfrontiers.org/norms

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 5

Executive summary
We started this research with a comprehensive Using the insights from the interviews, the team
literature review of the ILC space before created a decision making framework for orga-
moving into the data collection. Based on a nizations looking to implement ILC. This decision
dearth of relevant research available and the making framework (next page) is relevant to all
perceived consensus in the market that funds types of ILC.
with ILC were few in number, the research team
underestimated the amount of data that existed. Fund Considerations
Ultimately, the team was able to collect survey The report provides an overview of ILC using our
responses from 214 organizations (including framework that focuses on mechanism, yardstick
GPs, LPs and intermediaries) with 52 of the GP and governance decisions. Nonetheless, we found
respondents indicating that they currently used that there are several factors and considerations
ILC in their funds and another 45 indicating they that overlay all three. These include:
were considering building ILC into their current 1. Type of Fund: Affects fund manager’s ability to
or future funds. Some of the key findings of the influence investments, the type of investees,
survey included: return expectations, and timeframes.
• How? 74% of our GP respondents used impact 2. Size of Fund: Determines resources available for
linked carry with 14% using bonuses IMM and size of potential bonus pool.
• Why? Main motivations for ILC were the 3. Impact Objectives (Broad or Narrow): Relates to
alignment of practices and incentives across the the type of expertise needed at the governance
fund’s team and the probability of improvement level and choices of top-down versus bottom-up
of realized impact from their investments ILC approaches.
• How? 45% of GP respondents use bespoke 4. Relationship between Proxies and Financial
metrics (bottom-up) for each portfolio company, Returns: The perceived relationship affects
39% use standardized metrics across the many dimensions of ILC design.
portfolio (top-down) and 16% use a combination. 5. Track Record: Previous experience measuring
• Verify? 41% of GPs used third party verification. and managing impact supports ILC creation
and implementation.
The team chose to interview 38 of these organiza-
tions, focusing on the GPs, LPs and intermediar- 6. LP Alignment on Impact: Disagreement
ies who reported having already designed and among LPs may affect the ambition of the
implemented ILC. This selection of interviews structure, while strong alignment could be a
represented a cross section of geographies, sec- negotiating lever.
tors and a wide variety around the size of funds,
with the interviewees collectively managing $1.9
trillion in assets.
High level takeaways from our interviews included:
• ILC should be a subset of how a fund approaches
impact
• ILC should be approached with a testing and
learning mindset
• Stakeholder engagement is critical at all stages
of ILC
• Peer engagement and collaboration are essential
for establishing best practice

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 6

Decision Making Framework
Decisions Focus Areas Considerations

Choosing a model •• Existing financial incentives

•• Who should participate
•• Incentive timeline

Deciding what is at stake •• Carrot vs. stick

•• All or nothing vs. sliding scale
Mechanism •• Amount of compensation tied to impact

Operationalizing •• Cost allocation

•• Foregone compensation
•• Documentation and administration

Selecting metrics •• Relevant impacts and outcomes

•• Proxies
•• Number of metrics

Setting targets •• Level of ambition

•• Timeframe
Yardstick •• Level of flexibility

Getting to the portfolio level •• Top-down vs. bottom-up

(or not!) •• Weighting results
•• Opting out of portfolio-level integration

Designing structures •• Oversight bodies

•• Level of LP involvement
•• Use of outside expertise

Assigning responsibilities •• Metrics and targets approval process

Governance
•• Adjustments to metrics and targets
•• Target, data and process verification

Future Research
1. Utility and Best Practices: As the first 4. Understanding the LP Perspective: A greater
generation of ILC evolves, best practices may understanding of the LP perspective and a
emerge, including circumstances where ILC has practical implementation guide for LPs are
the most utility. required.
2. Aligning Incentives: Future research areas 5. Evolution and Trends: Changes and trends in
include exploring the extent to which ILC aligns ILC will yield insights into what has worked or
incentives, experiments with incentives across failed. Benchmarking ILC fund contracts against
multiple levels, and the impact of external other impact contracts may provide evidence
motivators on intrinsic motivation. of the increased attention to governance in the
3. IMM Research: Aligned with IMM, future research structure of the fund.
could determine whether ILC strengthens the
link between intentions and what is measured
and achieved.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 7

Methodology
Our research combined quantitative and qualitative data collection methods to develop a comprehensive
understanding of ILC practices.

Literature Review had further discussions in break-out rooms with

The research began with a review of the literature a member of the project advisory board and a
on ILC to help inform current practices and learn participating researcher. These meetings took
from a limited set of studies conducted in the area. place over the four months of the data collection
Based on the literature review, we developed a and analysis period, and the research team used
questionnaire that asked GPs and LPs about their them to test out initial findings and get feedback
ILC practices. A copy of the questionnaire is avail- from practitioners.
able here.
Data Analysis
Data Collection The data collected through the questionnaire
From the literature review and its own knowledge, and interviews was analyzed using a thematic
the research team invited a list of relevant GPs, approach that aimed to identify patterns and
LPs and intermediaries to fill out the question- themes within the data. For example, 50% of the
naire. The questionnaire was also made available GPs who participated in the collection analysis use
to the public to fill out over a period of eight weeks. ILC and of those, 73% are private equity (including
Of 214 respondents, almost half are GPs, and 52 of venture capital) funds. Of the LPs participating in
the GP respondents indicated having ILC. the analysis, 42% have invested in vehicles that
use ILC as an incentive mechanism.
Fig. 1: Survey respondents
Participant GPs, both with and without ILC,
responded that among the main motivations to
22% link compensation to impact are the alignment of
GP
practices and incentives across the fund’s team,
LP as well as improving the probability of realized
46% 20% Other impact from their investments.

Intermediary Fig. 2: GPS Motivations for linking impact

12%
Align practices and incentives
across the fund’s team 38%
Of 214 firms surveyed, nearly half were GPs Improving the probability of
realized impact 29%
Of the respondents, 48 GPs and LPs with ILC
Reduce the risk of intended
expressed interest in a follow-up interview, and out impact not occurring 13%
of which 38 organizations were interviewed. We
Achieving financial returns
conducted these interviews to develop case studies 12%
and further explore current practices. Interviews
were semi-structured, using an interview guide to
Avoiding negative impacts 5%
ensure consistency across interviews. Other 4%
We also invited LPs and GPs to a series of meetings
to discuss how they implement ILC and to delve Aligning practices and incentives were the
deeper into their decisions on governance, yard- top / foremost motivating factor
sticks, and mechanisms they use in ILC. The meet-
ings also featured case studies, and participants

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 8

GPs who practice ILC reported that carry is the Fig. 4: Interview subjects
most common mechanism, implemented by 74% of 3%
the respondents, followed by bonuses, which 14%
of GPs use. Ten per cent of GPs use an alternative
incentive mechanism, and only 2% use a combi-
nation of carry and bonus. The costs associated 22%
GPs
with developing and managing activities related
LPs
to these incentives are mostly covered by man-
agement fees (65% of respondents), followed by a 76% Other
combination of management fees, resources set
up in the LP agreement, and technical assistance.

Fig. 3: How are gps linking impact?

The majority of interviewees were GPs
2%
Fig. 5: Interviewee distribution
10%
3%
Carry
46% 20%
14% US/Canada
Bonus 8%
Europe/UK
Alternative Structure 27%
74% 11%
Africa
Carry & Bonus
22% Asia
11%
Latam
Carry was the most common mechanism in our survey
21%
19% Global

Australia/NZ
Regarding the verification of realized impact, 41%
of GPs said they use some form of third-party veri- Wide geographic spread of interviewees
fication. Almost half (45%) of the GPs track impact
performance by choosing specific metrics for each Interviewees collectively manage $1.9 trillion
portfolio asset, whereas 39% use standardized in capital. Just over half of the interviewees
metrics across the entire fund. Only 16% of the GPs manage less than US$100 million in assets under
use a combination of specific and standardized management (AUM), while 19% of the sample
metrics to measure impact performance. manage over $500 million. These figures represent
the firm-level AUM and not necessarily the amount
Interviewee Demographics
of capital managed with ILC.
This report draws heavily on case studies devel-
oped from the interviews of 38 GPs, LPs and inter-
Fig. 6: Interviewees’ assets under management
mediaries. As shown in figure 4, interviews focused
on GPs participants.
Interviews captured a wide geographic range of GP 19%
and LP experiences with the largest share of the
Less than US$100 MM
respondents having a regional investment focus
either in the US/Canada region or in Europe/UK. 51% Between US$100 MM & US $500 MM
Nonetheless, the interviews show there is a grow- More than US$500 MM
30%
ing trend of ILC use by both GPs and LPs with a
focus in Africa and Asia.

Interviewees collectively manage $1.9 trillion

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 9

Key takeaways
ILC should be a subset of how a fund Stakeholder engagement is critical at all
approaches impact. stages of ILC.
ILC is a way to link and align incentive structures Stakeholder engagement is an essential part of
to the fund’s impact objectives and operations. developing ILC structures that are not only cred-
As with a fund’s impact objectives, ILC should be ible and effective but also tailored to prioritize the
integrated into the fund’s strategy, governance most significant targets and impact objectives.
structure, investment management processes Stakeholders encompass LPs, GPs, investees, and
and reporting. other organizations and individuals with expertise
relevant to the fund’s objectives. A particularly
“ILC should be based on measures important stakeholder group includes those who
that are reflective of the fund’s bear the ultimate impact of investees and invest-
ments, particularly in the context of social and
overall strategy and goals. In many environmental impacts. These ‘end-stakeholders’
ways it’s a way to put concrete must be actively consulted to articulate their per-
measures in place around the spectives on the most vital social outcomes and
thereby inform the design of the ILC structure. This
strategic objectives of the Fund.” engagement should persist with ongoing social and
and environmental performance measurement,
- Caitlin Rosser, Director Impact Management
emphasizing a commitment to avoid potentially
Calvert Impact Capital
misleading proxies, in accordance with evolving
ILC should be approached with a testing impact reporting standards.4
and learning mindset. Peer engagement and collaboration are
Continuous learning and improvement are vital
for impact investors in order to stay effective,
essential for establishing best practice.
ILC models are a relatively new practice, particu-
responsive to changing conditions, and aligned with
larly in the alternative asset management space.
their mission of creating social and environmental
Our report highlights the value of undertaking
impact alongside financial returns. This approach
ILC with a collaborative and knowledge-sharing
also holds true for ILC structures. There is a notion
approach. This approach should include knowl-
that you have to “get it right” the first time, but
edge-sharing between GPs and LPs and across
there was general consensus that this is nearly
funds and others in the impact ecosystem. Much
impossible. The context in which funds are operating
of the feedback gathered during this project noted
is constantly changing. Therefore, piloting, testing
the value of speaking to other fund managers on a
and developing ILC mechanisms with the ability
similar journey. Because examples to learn from
(and resources!) to monitor, manage and adapt are
are limited, opportunities to speak to others have
essential for ILC to achieve its purpose.
enabled fund managers to pose key questions
about similar barriers they may have faced, and
how to avoid these.

4 For more on this please see: https://impactfrontiers.org/wp-content/uploads/2023/10/Exposure-Draft_Impact-Performance-Reporting-

Norms_Public-Consultation.pdf

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 10

Exploring Impact linked
compensation Options
Within impact investing, each level of fund activity warrants a different kind of compensation. This
can exist between asset owners and asset managers in the form of carry, or within organizations in the
form of bonuses (individual and portolio based) or performance evaluations. This section reviews each
of these options.

Table 1: Impact linked compensation Options

Level Compensation

Between asset owners and asset managers •• Carry

Within organizations (asset owners, asset •• Bonus based on portfolio performance

managers or portfolio companies) •• Bonus based on individual performance
•• Performance evaluation

Compensation between asset owners Vox Capital: Carry

and asset managers Vox Capital, a US$200 million fund with invest-
In private equity and venture capital, carried inter- ments in Brazil, links impact performance to
est (carry) is part of the standard 2/20 fund man- carry. Vox Capital uses a traditional waterfall
agement fee structure, in which the 2 represents compensation structure, but half of the carry is
the average 2% management fee, paid annually tied to impact performance. If the fund achieves
on AUM and the 20 represents a 20% share of the its impact target, Vox earns all of the carry, but if
profits of the fund that a fund manager receives the fund is below the impact performance thresh-
after certain financial targets (also called hurdles) old, it forfeits half of the carry (carry at risk). In the
are met. interview, Vox Capital reps explained that they
believed “we were claiming to really be an impact
Impact-linked carry integrates impact targets into investor who had these inner principles…, [but] to
the calculation of carried interest. Impact-linked claim to be an impact investor, you must have some
carry was the dominant mechanism in our data, impact linked compensation.” Carry was the tradi-
with 76% of respondents that have implemented tional VC model of compensation, so they married
ILC using it alone or in conjunction with other their inner principle of impact-led investment
models. As discussed in our methodology sec- with traditional waterfalls to create their ILC.
tion, this reflects the dominance of private equity
and venture capital funds in our sample. Within Compensation Within Organizations
this universe, the use of impact-linked carry was Within our research, we found that compensation
reported across fund sizes and among generalist within organizations can take one of three forms:
and specialist funds. (1) bonus based on portfolio performance, (2)
bonus based on individual performance, and (3)
Carry is a long-term incentive with payouts at exit
performance evaluations. These forms hold true
(of investments and/or of the fund). Traditionally,
for asset managers, asset owners and portfolio
senior team members are the ones financially
companies, but the scope of our research meant
rewarded through carry, but funds can make
asset managers are the focus of this report. As is
choices about who is rewarded via carry, including
mentioned in the future research section of this
junior team members.
report, we believe there is significant scope to
collect additional data for analysis in this area.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 11

Bonus linked to portfolio impact targets These structures can unlock additional
With bonuses based on portfolio impact targets, compensation for senior as well as junior staff. Of
the achievement and calculation of bonuses are the funds we surveyed, 16% use bonus alone or in
based on overall portfolio impact performance. combination with other ILC models. With a bonus
structure, funds have flexibility in implementing
Calvert Impact: Bonus based on
near- or far-term incentives for impact performance.
portfolio performance
In 2023, Calvert Impact, a nonprofit impact Performance evaluations
investing firm established in 1995 with over Fund managers can also link impact to perfor-
$500 million under management, launched a mance-evaluations more generally. In this case,
new bonus component to its compensation an individual’s performance score or eligibility
structure through its core debt portfolio. The for promotion would be tied to impact achieved.
compensation committee of the company’s Performance evaluations create near-term incen-
board of directors oversees the bonus pool allo- tives with annual periods of review.
cation and distribution. Calvert Impact’s bonus
Within performance evaluations, staff are typically
pool is based on the achievement of organiza-
asked in annual reviews about what they did that
tion-wide goals set at the beginning of the year.
related to impact and how they engaged actively
These goals now include an impact goal based
on impact as it relates to investment strategy. This
on its internal impact scorecard, which has a
type of evaluation could be done for impact profes-
strong emphasis on whether Calvert Impact’s
sionals as well as for investment teams.
capital was additional.
LeapFrog Investments: Performance
Bonus linked to individual targets
evaluation and an annual bonus
With bonuses based on individual performance,
LeapFrog Investments is a fund manager with
impact performance is a component of a team
over US$1B AUM that invests in high-growth
member’s individual evaluation and compensation.
financial services, healthcare and climate
Such a bonus structure includes clear impact tar-
solutions companies in emerging markets.
gets defined for individual staff members (related
It has an impact-linked performance evalu-
to performance and/or process) and is directly
ation framework that operates at both the
related to the achievement of these targets.
individual and firm-wide. Firstly, individual
Nuveen: Bonus based on individual annual bonuses for eligible staff members
performance are connected to the achievement of certain
Nuveen’s Private Equity Impact team, as part impact KPIs. Progress against these KPIs is
of its annual review, considers social and evaluated annually and formally factored into
environmental goals as part of the annual performance reviews. Each year, LeapFrog
ratings process. Most employees have a base also selects firm-wide impact KPIs, and per-
salary and variable compensation based in part formance against these firm-wide impact KPIs
on individual performance. Employees receive a influences the size of the leadership bonus
rating on a five-point scale based on their ability pool. These KPIs are based on both impact
to achieve certain goals, set at the beginning management (e.g., rolling out robust impact
of each year with their managers. For several monitoring frameworks for portfolio compa-
years, every employee on the Impact team has nies or building public impact insight indices)
had a goal related to the impact process (for and impact performance (e.g., KPIs such as
example, ensuring consistent application of the number of emerging consumers reached).
diligence templates) and/or performance (such
as obtaining specific environmental outcomes).

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 12

 This research covered compensation linked to impact, but this does not include all
financial incentives linked to impact within impact investing. There is a significant
amount of research around impact incentives, because financing models that tie interest
payments or capital repayment to impact performance have existed in the impact
investing and sustainable finance space for years.
Sustainability-linked loans (SLLs) and bonds (SLBs), which link sustainability targets
to the cost of capital for the issuer, are now some of the fastest growing financial
instruments in the world. As of July 2023, there have been over US$250 billion
in cumulative issuances. We believe that SLLs and SLBs have many overlapping
considerations with ILC for alternative asset funds and have noted some of these
connections in this report.
On the private capital side, impact-linked finance is also a growing field in which
funders tie impact targets to outcome payments, the cost of debt and/or principal
repayments. Unlike SLLs and SLBs, these contracts can include a third party willing to
make additional payment for the achievement of impact.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 13

Decision-making framework
One of the key concerns about ILC is its complex- We then discuss key considerations for making
ity. The majority of our survey respondents cited appropriate decisions. We use case studies to
this reason for not implementing ILC; many noted illustrate how different fund managers have
they didn’t know where to start. In this section, approached decision-making and design based
we attempt to break down the decisions required on these considerations.
to implement ILC into three categories: mecha-
It is important to note this is not a linear
nism, yardstick and governance. This framework
framework. The decisions required for design and
comes from Reward Value’s work, whose design
implementation of ILC are interrelated and require
considerations include selecting a mechanism to
an iterative learning process, as we note above.
link performance to pay, choosing the appropriate
Nonetheless, we are cautiously confident that we
yardstick to measure performance, and designing
have created in these pages a fulsome resource
fit-for-purpose governance.5
for diligently thinking through the design of ILC.
Within each of these decisions, we identify the
important areas to focus on in order to create
a systematic approach to decision-making.

Table 2: Decision-making framework for the design and implementation of ILC

Decisions Focus Areas Considerations

Choosing a model •• Existing vs. new financial incentives

•• Who should participate
•• Incentive timeline

Deciding what is at stake •• Carrot vs. stick

•• All or nothing vs. sliding scale
Mechanism •• Amount of compensation tied to impact

Operationalizing •• Cost allocation

•• Foregone compensation
•• Documentation and administration

Selecting metrics •• Relevant impacts and outcomes

•• Proxies
•• Number of metrics

Setting targets •• Level of ambition

•• Timeframe
Yardstick •• Level of flexibility

Getting to the portfolio level •• Top-down vs. bottom-up

(or not!) •• Weighting results
•• Opting out of portfolio-level aggregation

5 Reward Value is a non-profit that works with investors, universities and business to modernize executive pay as a catalyst for positive change.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 14

 Decisions Focus Areas Considerations

Designing structures •• Oversight bodies

•• Level of LP involvement
•• Use of outside expertise

Governance Assigning responsibilities •• Metrics and targets approval process

•• Adjustments to metrics and targets
•• Target, data and process verification

Mechanism Decisions
The reason for implementing ILC most cited by our survey respondents and interviewees is aligning prac-
tices and incentives. Our research shows there is early anecdotal evidence that ILC does just that – focus
attention on how impact considerations are integrated across investment practices. In order to do so,
our respondents stressed the need for ILC to be fit for purpose. Decisions for the ILC mechanism are
central to designing models that are appropriate and effective.
In this section, we break down the mechanism decisions into three focus areas: choosing a model, decid-
ing what is at stake, and operationalizing ILC. Within each of these we explore three key considerations:

Table 3: Mechanism decisions

MECHANISM DECISIONS

Choosing a model Deciding what is at stake Operationalizing

Existing vs new Carrot vs. stick Cost allocation

financial incentives

Who should participate All or nothing versus Foregone compensation

sliding scale

Incentive timeline Amount of compensation tied Documentation

to impact and administration

Choosing a Model
As discussed above, there are several ways to link compensation to impact, including carry, bonus and
performance evaluation. At this stage in ILC development, there is no wrong model, but in our research
we identified existing financial incentives of the fund, who should participate, and the timeline for ILC
incentives as key considerations when making mechanism decisions.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 15

 Who should participate
MECHANISM DECISIONS
Answering whose impact performance should be
rewarded financially is a key consideration when
Choosing a model
designing an ILC model.

Existing vs. new financial incentives Different ILC models incentivize different actors.
Impact-linked carry directly rewards fund manag-
Who should participate ers for impact performance. While adopters of
impact-linked carry cite the trickle-down effects
Incentive timeline of impact-linked carry throughout the fund, in
many funds, only senior level team members reap
the financial rewards.
Existing vs. new financial incentives
One participant noted that impact-linked
ILC can embed impact into existing financial incen-
tives or create new financial incentives linked “…carry creates an incentive for the
exclusively to impact. The fund’s organizational fund, [but] that fund-level incentive
structure and its existing financial incentives
inform ILC decisions. For example, many private doesn’t necessarily always reach
market funds in our sample that use a range of the investment team.… In [our] case,
strategies (equity, debt, and mezzanine) and real
the team didn’t necessarily feel that
asset funds used impact linked carry. (For more on
how different aspects of funds (size, asset type, pressure on them as much.”
etc.) feed into ILC decisions, see the Fund-Level
With bonus and performance evaluations, a broader
Considerations at the back of this report. Some
range of team members can participate in financial
of these funds also incorporated impact-linked
incentives at the fund, and even within portfolio
bonuses as a standalone approach or in conjunc-
companies.
tion with impact-linked carry. Existing financial
incentives within the fund help guide an organiza- Incentive timeline
tion to the appropriate starting point for ILC. Each ILC model — carry, bonuses, and performance
evaluations — has a different incentive timeline.
Impact-linked carry offers a long-term incentive
for fund managers at exit from portfolio compa-
“Carry is the standard for aligning nies. Long-term incentives help managers plan for
incentives between LPs and investment the future, but they also delay rewards on progress
teams. In 2013, as an impact investment made in the near term. Performance evaluations
fund we felt that we had to find a at the fund or portfolio company level do the
compensation mechanism that captured opposite, because they typically focus on annual
both financial returns and impact, with performance metrics and the incremental steps
a carry 100% generated by the financial to long-term impact. Bonuses offer flexible timing
performance and 100% constrained by with the option of annual bonuses, much like per-
the social impact. Carry seemed like the formance evaluations, or incentives to hit certain
right instrument as it’s a compensation benchmarks at the 3-, 5- or 7-year windows.
mechanism for the team, and it’s a tool Existing financial incentives, who should be
that LPs already understand well.” incentivized by ILC and when to unlock those
incentives are crucial inputs to selecting the
- Yannis Lambourdière
appropriate impact linked compensation model
Director, Investor Relations Impact Partners
for a given fund.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 16

 As Santiago Alvarez, Managing Partner at ALIVE Ventures, said,
“If you think about fund structures, where you require a long-term alignment
… we believe carry is where you get the alignment in terms of sourcing,
investing, management of our portfolio, and then also exiting. All other
incentive structures are more short term.”

There are three macro trends that are likely rel-

MECHANISM DECISIONS evant to this discussion. Firstly, fees for all active
fund managers are under significant pressure
Deciding what is at stake from asset owners. Secondly, the impact fund
managers in our survey market their funds as “mar-
Carrot vs. stick ket rate return” impact funds, often explicitly stat-
ing that their ability to create market rate returns
All or nothing vs. sliding scale relies on their unique impact thesis. Thirdly, the
recent growth of the impact investing market has
Amount of compensation tied to impact largely been driven by “market rate-seeking” LPs,
including large institutional investors, that are
attracted by the idea of not sacrificing financial
Deciding what is at stake returns for social impact. Together these trends
In this section, we’ll look at using impact per-
make it difficult for “market rate” impact funds to
formance as a carrot or a stick, using an all-or-
convince “market rate” LPs to pay additional fees
nothing approach versus a sliding scale, and the
for impact created.
amount of compensation tied to impact.
GAWA Capital: carry at risk
Carrot vs. stick
GAWA Capital, a €200 million fund based in
Technically, ILC can be designed to unlock addi-
Madrid, invests only in emerging markets
tional compensation or to forfeit a portion of
with the goal of transforming lives in vulner-
compensation if impact targets are not met. This
able communities. GAWA uses carry as its
concept applies to carry, bonus, and performance
ILC mechanism and follows a typical 2-and-
evaluations, but realistically looks quite different 20 model with half of the 20% carry linked to
for each of these types of mechanisms. impact performance. The base carry is 10%
One of the debates in impact-linked carry has been and is conditional on financial performance
whether impact achievement results in additional (meeting the financial return hurdle rate).
carry beyond the traditional 20% profit that LPs Additional carry is based on the impact score
share with fund managers. Some fund managers of the investment at the time of exit. The
have argued that they should be rewarded beyond impact score is based on a scale of 0-10 and
the traditional financial terms for additional impact represents the additional carry available. For
created. According to our survey responses, 69% example, an impact score of 3 is added to the
of LPs do see ILC as a carrot – a good tool for 10% carry to create an 87/13 split, whereas a
inducing impact performance. Yet carry at risk score of 8 bumps carry up to 18%.
was the most common form of mechanism in our Notwithstanding the trends discussed above, we
data, meaning the majority of carry mechanisms did see a couple of examples in our data of LPs
observed in this research were structured so a who were willing to offer additional fees beyond
portion of GP carry would be forfeited if impact the traditional 20% carry for impact achievement.
targets were not achieved. This implies that fund
These LPs tended to be “impact first” in their pri-
managers are structuring their carry calculation orities and thus willing to trade financial returns
in a way that integrates impact into the traditional for additional impact created.
20% profit share.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 17

 Sweef Capital: Additional carry to roll-out of this tool, BII modified its Long-
facilitate technical assistance Term Incentive Performance Plan (LTIPP) to
Sweef Capital, a $43 million fund based in integrate the portfolio-level impact score.
Singapore, invests in EBITDA-positive growth The LTIPP is now based on three components:
businesses across Southeast Asia in health- (1) financial return of the total portfolio; (2)
care, education, sustainable foods and cli- development impact of the portfolio based on
mate resilience that demonstrate a clear com- the portfolio Impact Score; and (3) corporate
mitment to gender equality in their leadership, objectives score.
operations, and value chains. To enhance
Of the performance evaluations we reviewed, we
gender impact outcomes, Sweef aligns impact
typically noted that impact considerations were
targets to its carry structure. Beyond financial
integrated into existing evaluation processes,
gains, its investors expressed a keen interest
serving as an integrated approach to incentivizing
in promoting technical assistance activities to
and holding staff accountable to individual and/or
bolster Sweef’s Capital’s Gender ROITM thought
broader impact-related objectives.
leadership in the industry. In pursuit of this
goal, Sweef has integrated five impact tar- All or nothing vs. sliding scale
gets into its compensation mechanism, with Funds should also determine whether the achieve-
some focused on gender targets and others ment of impact targets unlocks full compensation
on ecosystem building and climate integra- tied to impact (effectively all or nothing) or should
tion. Failure to meet these targets results in reward progress if full attainment isn’t achieved.
a forfeiture of carry; successful attainment Vox Capital, featured above, uses an all-or-nothing
allows Sweef to surpass the standard 20% approach to carry. Once financial returns are met,
carry it would have earned. Depending on the impact performance “gates” the impact-linked
achievements, Sweef can earn between 18.5% carry. When the fund achieves the impact target,
and 33% based on the targets fulfilled. it unlocks the 50% of carry that is at risk for the
As noted in the Exploring ILC Options section, link- managers.
ing bonuses to impact performance can be done Sliding scale approaches account for incremental
in any organization (within LPs, GPs or portfolio or relative progress against a goal(s). In general,
companies). In theory, bonus structures can also we saw two different approaches to sliding-scale
be used as a carrot or a stick, but in reality they structures. The first is an impact range approach,
tend to be more aligned with putting bonus at risk where a range of impact performance is defined
(stick). Bonus pools are typically contingent on with a set range of carry received.
financial performance of the organization, thereby
making it hard to compensate for impact perfor- Ship2B Ventures’ B Social Impact Fund:
mance separate from financial performance. The sliding scale with an impact range
majority of bonus structures we reviewed inte- The B Social Impact Fund is a €55 million fund
grated added impact considerations to existing with a primary geographic target in Spain
bonus compensation structures, but based on a and 100% of its carry at risk, after meeting
fixed pool determined by financial performance.6 its financial hurdle. The fund is managed by
Ship2B Ventures. If the fund fails to achieve
British International Investment 60% of its impact targets, then all carry is
(BII): integrating impact into bonus forfeited. If the fund achieves 80% or more
structures of its impact target, then the whole carry is
BII has developed a portfolio-level impact tool unlocked. Impact performance between 60
called the Impact Score that quantitatively and 80% of impact targets earns a sliding-
assesses impact aligned with BII’s strategy, scale carry.
across all investments. Aligned with the

6 The scope of this research did not dive into the detailed mechanism of bonus structures, but this is an area we have identified for future
research studies.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 18

The second approach is a sliding scale based on a bonus pool tied to impact, and another featured
relative performance. This is where the percent- impact as one of five bonus pool considerations.
age of the goal achieved is equivalent to the per-
Impact Partners: 100%
centage of carry at risk achieved.
Impact Partners is a €340 million fund that
Circulate Capital: sliding scale with invests in social businesses across Europe.
relative performance Impact Partners uses carry as its ILC struc-
Circulate Capital, a specialist fund invested in ture once the financial hurdle, which is a 7%
the plastics supply chain, has a sliding-scale net internal rate of return (IRR), is reached.
model based on relative performance. The 100% of that carry is linked to impact perfor-
fund’s impact target of preventing plastic mance. For each portfolio company, an impact
pollution is based on the total fund size. The target is defined. At exit, the ratio between
fund starts to qualify for payments at 25% the realized performance and the target is
of the target (anything less than that and the the impact performance of the assets. The
payment is forfeited). Additional plastic pol- average impact performance of the portfolio,
lution prevented above the 25% target earns weighted by the amount invested, results in
additional payments until the full target is met the impact performance of the portfolio. If
and the full payment made, with payments the portfolio’s impact performance is below
increasing in 1.75% increments. the impact hurdle, which is 60%, all the carry
is given to NGOs. If the impact performance is
“Once we hit the target, then 100% above the impact hurdle, the carry is split pro
of [the payment] was released. The rata between the team and NGOs.
sliding scale was important because Developing World Markets: 75%
Developing World Markets (DWM) is a US$550
if we get halfway there, then we still
million impact investment fund manager rais-
should get 50% of the carry that’s ing a US$75 million fund focused on forcibly
being held in escrow, because it displaced communities. DWM invests in com-
panies that are addressing societal needs in
wasn’t a complete failure.” underserved regions such as Latin America,
- Rob Kaplan, CEO, Circulate Capital Africa and the Middle East. DWM will use carry
Our carry data to date contains examples of both in its ILC structure once the financial hurdle is
approaches, with slightly more frequent use of reached. Of that carry, 75% is linked to impact
all or nothing than sliding scales. All-or-nothing performance in three equally weighted met-
approaches to carry are likely dominant because rics of DWM’s portfolio companies: refugees
they mirror the classic waterfall compensation served, women served, and income growth of
structures in traditional finance. Both funds internally displaced persons.
and investors are familiar with the all or nothing Drawdown Fund: 50%
approach in traditional funds. The all or nothing The Drawdown Fund, a US$250 million fund
approach also offers funds simplicity for drafting, based in Utah, US, invests in catalytic growth
implementing, monitoring, and awarding the ILC. equity businesses that address the major
Of the bonus examples we examined, many fol- drivers of climate change. Its investments
lowed a sliding-scale approach. target sustainable cities, food and agricul-
ture, and energy. The Drawdown Fund uses
Amount of compensation tied to impact
carry as its ILC structure once the financial
Funds must set the amount of compensation tied
hurdle is reached. Half of that carry is linked
to impact. Funds in our sample reported a wide
to impact performance. If its portfolio com-
range of carry mechanisms, from 5% to 100% of
panies achieve certain emissions objectives
the chosen compensation model, with 50% as the
(reduction or sequestration), then the carry is
median amount. We had fewer examples of bonus
delivered to the Drawdown Fund.
in our sample, but some models included 50% of

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 19

 New Forests: 20% in vulnerable communities in emerging
New Forests, a A$11 billion investment man- markets. This mission is achieved primarily
ager headquartered in Sydney, Australia, through strategic investments in companies
invests in sustainable timber plantations and like microfinance financial institutions, credit
conservation areas, carbon and conservation cooperatives, fintech companies, and leasing
finance projects, agriculture, timber process- organizations. To further its transformative
ing and infrastructure. In its first Africa fund, objectives, GAWA Capital uses a technical
the Africa Forestry Impact Platform (AFIP), assistance facility to enhance the products,
a US$500 million (targeted) open-ended processes, and capabilities of its portfolio
vehicle focused on forestry investments in companies. Technical assistance can be
Sub-Saharan Africa, NF uses carry as its ILC deployed to develop and launch specialized
structure once the financial hurdle is reached. products tailored, for example, to smallholder
Of that carry, 20% is linked to the delivery of farmers, as well as robust risk management
positive impact outcomes across the four systems that equip smallholder farmers to
themes of climate, biodiversity, gender, and withstand challenges like climate events and
community and livelihoods. natural disasters.
ALIVE Ventures: using technical
MECHANISM DECISIONS assistance to deepen impact
measurement activities
Operationalizing ALIVE Ventures, an impact investment fund
manager with US$71 million in AUM, invests
Cost allocation in companies that use technology and other
innovations to address income inequality in
Foregone compensation Latin America and uses technical assistance
to undertake more rigorous impact measure-
Documentation and administration ment activities of key demographics, such
as exploring gender inclusion in underserved
Operationalizing populations. The technical assistance facil-
In this section, we cover some of the operational ity allocates resources that support impact
decisions required when setting up an ILC mecha- measurement studies and gender-related
nism. These include allocating costs, deciding assessments. The findings from these stud-
what happens to foregone compensation, and ies play a vital role in evaluating the impact of
documenting and administering ILC. each portfolio investment. These studies are
not used for meeting predefined performance
Cost allocation criteria; instead, they serve as essential inputs
Despite the strong belief from the sample that for the comprehensive evaluation of portfolio
impact and financial performance go hand in hand, companies’ overall impact.
measuring and overseeing impact performance
undoubtedly cost funds time and money, so one Foregone compensation
of the most common questions is, “who pays?” Another logistical concern involves what to do
Respondents typically funded ILC yardstick and gov- with unearned ILC money, whether carry or an
ernance through management fees, although we unearned bonus pool. In the event that carry is
did encounter several outliers who used technical earned and held in escrow but not unlocked for
assistance to help fund the impact measurement managers because of subpar impact perfor-
and management (IMM) associated with their ILC. mance, who gets the money? In the funds that
participated in our research the unearned carry
GAWA Capital: amplifying impact using at risk either goes back to the LPs or can be dis-
technical assistance tributed to another organization that can achieve
GAWA Capital’s investment funds are dedi- related impact outcomes. Similar approaches can
cated to catalyzing positive transformation be used with unearned impact bonus pools.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 20

 GAWA Capital: forfeiture to investors Documentation and administration
GAWA Capital employs a flexible fee structure This report highlights the many considerations
that prioritizes the financial interests of its that feed into an ILC structure and management
investors if impact is not attained. Specifically, which need to be clearly documented to create
10% of its carried interest is linked to its impact clarity, transparency and accountability among
performance, assessed on a 10-point scale. stakeholders. Most, but not all funds document
Investors are guaranteed a minimum of 80% ILC in the limited partnership agreement (LPA).
of the total carried interest. In the event that Concerns about the flexibility to adjust ILC terms
the fund’s impact score falls below a certain and the approval process required to amend the
threshold, GAWA Capital allocates more of the LPA can push ILC provisions into other docu-
carried interest to its investors. ments like side letters, charters, and subscrip-
tion agreements.
For instance, if GAWA Capital achieves a score
of three on its impact assessment, it will Many carry mechanisms have a gap between when
receive only 3% of its allocated impact por- managers earn carry from a financial perspective
tion, alongside the 10% financial carried inter- and when carry is unlocked by impact perfor-
est. This means that investors will receive the mance. Carry is earned when financial hurdles
remaining 87%. Conversely, if GAWA Capital are met but not unlocked until the end of a fund’s
excels in its impact efforts and attains a score life, when final impact assessments can be made.
of nine, it can claim up to 9%, while ensuring Most funds hold the eligible impact-linked carry in
that investors still receive 81%. escrow until distribution. Escrow and redistribu-
tion of unearned carry are additional ILC terms
On the other hand, compensation foregone
that should be included in the legal documenta-
because of impact underperformance can be
tion, whether in the LPA or elsewhere.
directed towards achieving the fund’s impact
objectives through other means. For example, Conclusion
within carry mechanisms, the portion of impact Whatever ILC mechanism is chosen, it is a way to
carry that isn’t achieved can be directed to an further integrate impact in fund operations and
organization, such as an NGO, that focuses on the incentives. First-generation ILC models will likely
Fund’s impact objectives. Interviewees did not evolve. For example, funds may move from bonus to
discuss forgone compensation mechanisms for carry or choose to add performance evaluations of
bonus structures, but a similar approach could the portfolio company teams or some combination
be applied. of all of the above. Stakeholder feedback about ILC
outcomes and consequences can shape second-
Impact Partners: redirected to an
generation ILCs. Last, but not least, whatever ILC
external party
is implemented, sharing the approach and lessons
After reaching their investment hurdle rate,
learned with funds and the impact community will
Impact Partners evaluates whether it has
help facilitate other first adopters and the evolu-
reached its impact hurdle of 60%. Should it
tion of second-generation ILCs.
not reach 60% of its impact targets across the
portfolio it forfeits all of its carry to NGOs that
will help indirectly reach these targets. Should it
exceed its impact hurdle of 60%, the carry is pro-
rated with any unearned carry donated to NGOs.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 21

 yardstick Decisions
Table 4: YARDSTICK decisions

YARDSTICK DECISIONS

Selecting metrics Setting targets Getting to the portfolio level

(or not!)

Relevant impacts Level of ambition Top-down vs. bottom-up

Proxies Time frame Weighting results

Number of metrics Level of flexibility Opting out of portfolio-

level aggregation

GPs and LPs consistently identified target and metric-setting as the most challenging part of ILC design.
Several survey respondents, interviewees, and convening participants expressed how hard it is to craft
an appropriate — meaning tailored, ambitious, and aligned — yardstick. In our survey, the fund managers
that did not currently have ILC cited the complexity of ILC and the difficulty of standardizing IMM at a
portfolio level as the biggest factors keeping them from linking compensation to impact. Metrics and
portfolio-level standardization were consistently identified during the convening series as among the
most pressing concerns for fund managers designing ILC.
In this section, we break down yardstick decisions into three focus areas: selecting metrics, setting targets,
and getting to the portfolio level (or not!). Each of these decisions has three considerations that we explore.
As discussed in the Methodology section, the breadth of funds surveyed and interviewed for this project
is large, with nearly every type of impact sector represented. As such, while we were not able to specify
guidance to any type of fund, we believe the lessons in each of these sections are applicable across size,
sector and geography.

Selecting Metrics
YARDSTICK DECISIONS Metric selection is a core decision when design-
ing (and revising) ILC structures, because com-
Selecting Metrics pensation is based on an impact performance
assessment that must ultimately be measured
Relevant impacts by a metric or metrics. Determining which met-
rics to use in performance assessment requires
Proxies fund managers to identify relevant impacts and
determine proxies for these impacts. The number
Number of metrics of metrics linked to compensation, based on the
number of impact objectives linked to compensa-
tion and what is needed to create proxies, is also
a key decision.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 22

Relevant impacts and outcomes
All funds (and their investees) have impacts — Sustainability-Linked Loan/
positive, negative, intended and unintended — but Bond Principles
not all impacts are equally important or signifi-
cant. See page 5 for the definition of impacts and While the focus of this research has
outcomes and how the terms are framed in this primarily been in alternative assets,
report. The relevance of any given impact is deter- specifically VC/PE funds, guidance
mined by the context in which the fund operates, designed for other impact products
the fund’s goals and objectives, and the needs of dealing in incentives is highly relevant.
end-stakeholders affected. For example, the Sustainability-Linked
The importance of linking compensation to Loan Principles were developed with
relevant impacts is often best described via an the aim of creating consistency and
example of irrelevance. Consider a hypothetical credibility for Sustainability-Linked
investment by a private equity firm in a healthcare Loan (and Bond) products and include
company in an underserved area. The healthcare guidelines on the selection of relevant
chain has many impacts on its stakeholders, both metrics (which are referred to as KPIs).
positive and negative, including the communities it
serves, the people who work for the company, and “KPIs must be:
the environment. The private equity firm chooses • relevant, core and material to the
to link its internal compensation structure to borrower’s overall business, and of high
the amount of paper recycled at the company. strategic significance to the borrower’s
While this is an impact that could be important current and/ or future operations;
to manage, it is not the impact most relevant to
the company (or likely to its stakeholders). The • measurable or quantifiable on a
importance of identifying relevant impact and consistent methodological basis; and
outcomes cannot be overstated. In this example, • able to be benchmarked (i.e. as much as
it is possible for a fund manager to implement an possible using an external reference or
ILC structure “successfully” with no real positive definitions to facilitate the assessment
impact on the lives of people or the planet. See the of the sustainability performance
Further Research section for areas of additional
target’s level of ambition).”
research around this topic.
- Sustainability-Linked Loan Principles
(February 2023)
Materiality Sustainability-Linked Loan Principles

The topic of relevance is often framed

in the context of materiality. A
number of organizations are tackling
materiality from the point of view of The topic of Selecting Metrics is directly
end-stakeholders affected, including related to the role of governance in
Social Value International and the overseeing metrics used as the basis for
Impact Management Platform. It is also ILC. See page 38 for more details.
a core focus of Impact Frontier’s Impact
Performance Reporting Norms. See the
resources from these organizations for
more information on this important topic.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 23

This research did not assess the relevance of the metrics are relevant to each context, the fund’s
impacts chosen by funds, but it did explore the ways Impact Advisory Council sets metrics and tar-
in which funds choose relevant impacts. Funds that gets for each community. The council consists
participated in our research have approached the of internal staff from the investee organiza-
selection process in different ways, often relying tions, Broadstreet, and an expert in rural devel-
on more than one approach. These approaches opment whose role is to build local partnerships
include but are not limited to using a third-party in the community for the fund and represent the
standard, seeking input directly from end-stake- community voice in several areas, including in
holders (or indirectly through third parties such metric selection.
as 60dB, an impact measurement company), and
Happiness Capital: choosing impacts
aligning to evidence that connects chosen metrics
by aligning with evidence and
with the Fund’s impact objectives.
involving those impacted
GAWA Capital: choosing impacts based The mission of Hong Kong-based global VC
on a third-party standard Happiness Capital is to make the world a happier
GAWA Capital’s mission is to transform the lives and healthier place. Its Happiness Return meth-
of vulnerable communities. Its second fund, odology, which is linked to the team’s internal
launched in 2014, the Global Financial Inclusion bonus structure, considers both subjective
Fund (GFIF), linked carry to compensation with and objective components of happiness. The
a composite score of 25 metrics reflecting the ‘conditions’ of happiness are aligned to OECD
Smart Campaign Client Protection Principles Better Life indicators, and the ‘experiences’ are
(CPP) and aligned to GIIN IRIS+. At the time, the aligned to PERMA+7 (a scientific model of happi-
CPP was the first global client protection stan- ness). Data is collected from end beneficiaries
dard developed for low-income customers of via 60dB; Happiness Capital also engaged an
financial service providers. As third-party stan- external consultancy to support the design of
dards in financial services have evolved, so too this framework.
has GAWA Capital’s compensation structure.
Proxies
Broadstreet Impact Services: choosing Impact, as defined by the Impact Management
impacts by involving those impacted Project, is a change in a social or environmental
Broadstreet Impact Services supported a for- outcome caused by an organization (see callout
estry fund in the design of its ILC structure. The box on page 5 for a more detailed definition).
fund has three goals when making investments Impact pathways are often used to describe the
in distressed rural communities: increased link between organizations’ inputs, activities and
economic opportunity, increased community outputs with their effects on people and the natural
wealth, and increased community resilience. environment, notably outcomes and impact.
Although these goals are consistent across
The graphic below from the Impact Management
investments, the context, and therefore the
Platform presents a common model of an impact
metrics used to assess these objectives, var-
pathway.
ies across communities. To ensure the chosen

Fig. 7: The impact pathway

Inputs Activities Outputs Outcomes Impacts

Drivers of impact

7 Seligman, Martin (2018): “PERMA and the building blocks of well-being,” The Journal of Positive Psychology, DOI: 10.1080/17439760.2018.1437466

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 24

The majority of ILC models we reviewed did not link to structure is tied to the average median income
direct measures of impact. While many participants (AMI) of the portfolio. CHAI noted that while AMI
noted a desire to find ways to more directly link to doesn’t fully capture the impact it intends to
impact measures, they expressed concerns about have, it is a metric that is readily captured by
the difficulty and cost in collecting precise impact investees and widely considered by affordable
data. Respondents frequently reported that prox- housing players in the US as a proxy for the level
ies — typically outputs, and occasionally outcomes of need of the household being served.
— were employed as the basis for their ILC models.
Chi Impact Capital:
Of the ILC models we looked at, funds used a vari- seeking outside expertise
ety of ways to define proxies for relevant impacts Developing proxies for pre-revenue compa-
of focus. We also heard that organizations often nies that have a limited impact track record
used outside expertise, directly or indirectly, to in the sector can be challenging. To record
identify proxies. Some methods of determining the most relevant impact metrics, Chi Impact
proxies are highlighted in the case studies below: Capital’s (Chi) Head of Impact works with port-
folio companies to create a baseline of robust
Acumen: establishing a clear
KPIs that align with EU’s Sustainable Finance
methodology to determine proxies
Disclosure Regulation (SFDR). To ensure these
Acumen is a global nonprofit aiming to change
KPIs are suitable proxies for impact, they
the way the world tackles poverty by investing
are reviewed in collaboration with its impact
in sustainable businesses, leaders, and ideas.
validation committee, an independent body of
Acumen has designed impact-linked incentives
two experts with sector-specific expertise for
across several entities, for teams, investee
Chi’s Burning Issues Impact Fund (BIIF).
companies, as well as Acumen as a fund. For
example, Acumen’s KawiSafi Fund linked impact A common approach to developing proxies is to
to carry based on the number of lives impacted. use composite scores, which combine multiple
It realized 1oom lives impacted, well over the tar- metrics, often weighted, into a single score tied to
get. As another example, Acumen’s Education impact. The two main types of composite scores
Facility offers impact incentives to the company we observed were those developed in-house,
as well as Acumen as the investor. To guide many based on the Impact Management Project’s
internal processes for selecting impact metrics five dimensions of impact, and those based on a
to link to compensation, Acumen established third-party tool or standard.
a methodology for determining proxies. This
ALIVE Ventures: a composite score
methodology sets out guidelines for credible
based on IMP’s five dimensions of impact
and justifiable approaches for team members
ALIVE Ventures seeks to improve the lives
and companies to determine proxies, the types
of low-income communities across Latin
of source data that can be used, and ultimately
America and has adapted a number of aspects
the relevant metrics to be connected with the
of its ILC approach since establishing its first
incentive. Importantly, these metrics must not
ILC structure in 2018. Its second fund, launched
only be practical but also require the team and
in 2023, linked carry compensation to a com-
company to be able to influence and claim attri-
posite score based on IMP’s five dimensions
bution for them, to magnifythe effectiveness of
of impact and ALIVE’s core impact objectives:
the incentive.
quality-of-life improvements, gender inclu-
Weave Finance: using proxies agreed sion, and reaching low-income communities.
by industry At exit of each portfolio company, ALIVE
Weave Finance’s Colorado Housing Accelerator calculates a total impact score using data col-
Initiative (CHAI) invests in affordable housing lected throughout the life of the investment.
projects, an impact area where proxies have These scores feed into a composite, portfolio-
been well established through government and level score that determines the award of carry,
industry practice. CHAI’s impact-linked carry weighted by the amount invested.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 25

 Vox Capital: a composite score based Number of metrics
on a third-party tool Because ILC structures are ultimately based
Vox Capital launched its impact-linked incentive on the achievement of targets as measured by
program for its first fund in 2016. The methodol- certain metrics, how many metrics to link to com-
ogy has evolved over time and is currently linked pensation is a key decision and is directly related
to the B Impact Assessment (BIA), a standard to the relevant impacts of focus and the practical
developed and governed by B Lab. The BIA is a proxies used. We observed that the majority of
composite score based on questions about a ILC models that link compensation to impact use
company’s practices and outputs across five between one and four metrics.
categories: governance, workers, community,
• Circulate Capital’s third fund links carry to one
the environment, and customers. Vox portfolio
metric: tons of plastic pollution prevented,
companies are scored on the BIA annually, which
which is the core object of the Fund.
feeds into a portfolio score calculated as an
average of each company’s score weighted by • Acumen’s KawaSafi Fund links carry to the lives
net asset value (NAV). This portfolio-level score impacted (including number of people impacted
is linked to the fund’s carry compensation. who live below the poverty line) plus CO2 averted.
• Acumen’s Education Facility links
It was beyond the scope of this research to deter- performance-based finance to scores for
mine whether proxies were “practical and accu- breadth (lives impacted), inclusivity (poverty
rate” reflections of the overall impact objectives. focus), and depth of impact (how much the
This topic is discussed in more depth in the Future students’ learning improved).
Research section.
• DWM’s Displaced Communities Fund links
carry to three portfolio targets: the number
Unintended consequences of refugees and internally displaced persons
of proxy selection served by the fund, a proxy for livelihood
improvement in host and source communities,
Conducting a detailed assessment on the and a metric for asset and income growth of
quality of proxies used by fund managers the women being served.
goes beyond the scope of this research.
• BII links bonus compensation to a single impact
However, we observed that incentives metric, which is a composite score called the
that don’t fully represent the impact portfolio Total Impact Score.
targeted by the fund, often true of output
level proxies, can have unintended YARDSTICK DECISIONS
consequences. For example, one fund
we spoke to had a focus on improving Setting targets
the lives of individuals in low-income
communities. The first iteration of its Level of ambition
ILC linked compensation to the number
of clients served. Although this is an Time frame
important measure of scale, it did not
account for measures of WHO was being Level of flexibility
served or HOW they benefited (or not).8
The manager noted that as a result, The metric(s) linked to compensation at the portfolio
the fund’s pipeline and investment level is not necessarily the same as the metric(s) used
selection process were skewed towards to measure actual performance. In many instances,
the metric linked to compensation was a composite
investments that could reach more
score with many underlying performance measures
people but may not have been serving
feeding into it. Another common approach was to
them in meaningful or positive ways.
8 https://impactfrontiers.org/norms/five-dimensions-of-impact/

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 26

link compensation to the achievement of impact forecast based on various assumptions, the
metrics and targets set at the individual investment market context, company growth expectations,
level. See Getting to the Portfolio Level (or Not!) for and so on. The impact model identifies the rel-
more detail on decisions on standardization across evant metrics and targets that serve as proxies
the portfolio versus individualization at the investee for impact achievement. The impact model,
level, as well as different approaches to tying impact including its level of ambition, is then validated
to metrics at the portfolio level. by a leading consultancy in the relevant space.
Setting targets Masawa Fund: using a governance
A fundamental aspect of ILC is the setting of targets body to review ambition
that determine the level of compensation. Setting Masawa Fund (Masawa), which invests in
targets with the appropriate level of ambition is European startups catalyzing mental health
essential to creating ILC structures that are aligned and wellness, employs impact-linked carry.
with the strategic goals of the fund. In our research, Masawa established an Impact Committee
we identified several strategies funds use to assess for broader impact oversight whose role is
the appropriateness of the target’s level of ambition. to review the targets set and provide input
We also saw different approaches for determining before proceeding.
the time frames of targets, as well as different levels
Timeframe
of flexibility in changing or adapting targets through-
The target used as a basis for an ILC structure must
out the lifecycle of the fund. We explore each of
be linked to a timeframe. While the majority of our
these three considerations further in this section.
respondents had traditional closed-end 10-year
Level of ambition life funds, there was significant variation in the
Setting an appropriate level of ambition for tar- timeframes used to manage ILC targets. These dif-
gets is essential for achieving impact objectives. ferences are directly related to a fund’s strategy, the
Targets that are not ambitious or meaningful may impacts and metrics it uses, and the way in which it
not drive progress towards the fund’s impact assesses performance at a portfolio level.
objectives, and targets that are too ambitious may
Examples of different approaches to setting time-
be unrealistic and demotivating.
frames for ILC targets are captured in the case
Many of our interviewees openly admitted to strug- studies below:
gling with whether they had set ambitious targets,
Circulate Capital: fund level target
particularly when their investees have varying
set for fund life
capacity to collect relevant baseline impact data
Circulate Capital ties carry to a target focused
in which managers need in order to develop impact
on plastic pollution prevented over the life of the
targets. Determining an “appropriate level” of ambi-
fund. The ILC structure is part of the LPA, but the
tion can also be subjective. To address this subjec-
specific target is based on the fund’s size at final
tivity, we observed a number of instances in which
close. The target is fixed for the life of the fund
funds used external inputs to set and/or confirm
but is not defined until the final close.
the level of ambition. For example, some fund man-
agers use third parties to validate the level of ambi- Nuveen: individual targets for
tion of goals set at the portfolio and/or individual investments set on an annual basis
investment level. Governance for assessing the Nuveen Private Equity Impact sets targets
level of ambition is a key consideration discussed on an individual company basis annually and
further on page 38-39. measures performance based on the percent-
age of that impact target achieved, according
Drawdown Fund: using third-party
to its established target-setting protocol. This
verification to assess level of ambition
structure is specifically designed to reflect
The Drawdown Fund links carry to CO2 emissions
the stage at which Nuveen invests — growth
sequestered and greenhouse gas emissions
equity — and to ensure flexibility for adapting
reduced. The fund also works with each investee
to changing circumstances.
to define an “impact model,” an analysis and

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 27

Level of flexibility New Forests: flexibility in setting
Impact is dynamic. Respondents noted that the targets with input from LPs
context in which a fund operates changes along During the formation of AFIP, NF, in collabora-
with sector advances, research, and lessons tion with cornerstone LPs, established four
learned, all of which influence a fund’s strategy, portfolio-level targets for the desired level of
impact management practices, and potentially impact achievement at year 10. Though AFIP is
the metrics and associated targets linked to com- an evergreen vehicle, the compensation struc-
pensation. Our research noted that several funds ture follows a typical closed-end fund time-
acknowledged these changing dynamics by build- frame. After deployment, each asset will pro-
ing flexibility into their ILC structures. vide baseline data for each of the four impact
metrics. Depending on the assets in the fund,
Nuveen’s individual targets, which are set annually,
the targets may need to be adjusted up or down
are an example of how funds incorporate flexibility
to ensure they are sufficiently challenging but
into the design of their ILC structures as well as the
still within reach during the impact period. Any
ability to revise targets. Other examples of this flex-
adjustment will be agreed with fund LPs through
ibility are illustrated in the case studies below:
the appropriate fund governance structure(s).
Mirova Gigaton Fund: ex-post design
Masawa FUND: two sets of impact
of ILC methodology
targets dependent on company stage
The Mirova Gigaton Fund is a fixed-return debt
Masawa invests in early-stage companies
fund seeking to accelerate the clean energy
that may change their product and strategy as
transition in emerging countries, predomi-
they grow. As such, Masawa and the founders
nantly in Africa and Asia Pacific. The fund has
initially co-create provisional impact targets
several impact goals aligned to the SDGs, such
that help the companies get to product-market
as but not limited to offsetting CO2 emissions
fit; if there’s no product-market fit, there’s no
and advancing gender equality. The terms of an
impact. Then, at Series A, Masawa co-creates
impact performance bonus were agreed with
the long-term impact target to which Masawa is
LPs in the fund documents prior to launch, but
held to account.
the specific metrics and performance assess-
ment methodology will be determined in due
course and are subject to agreed governance
processes. The annual bonus does not com-
mence until year eight of the fund’s 15-year life,
enabling the fund manager to design a method-
ology ex-post based on the real portfolio com-
position, rather than a hypothetical one.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 28

 • Top-down: In this approach, a metric(s) and
YARDSTICK DECISIONS
target(s) are determined at the portfolio level.
Metrics are collected consistently across all
Getting to the Portfolio Level (or not!)
investments and aggregated to the portfolio
level. For example, a fund links compensation
Top-down vs. bottom-up to a CO2 savings target and aggregates CO2
savings across all investments to assess
Weighting results performance against that target. This practice
was more common for funds with a more
Opting out of portfolio-level aggregation narrow impact mandate.
• Bottom-up: In this approach, one or more
metric(s) and target(s) are determined at the
Getting to the portfolio level (or not!) individual investment level with different
One of the most common challenges we heard approaches used to aggregate performance
from funds involved aggregating impact perfor- to the portfolio level. The most common
mance. The Methodology Section noted that the approach we saw was when funds select
majority of funds not currently using ILC cited the impacts and targets that were relevant to the
difficulty in standardizing IMM at the portfolio level specific investment and then anchor ILC at the
as the number-one reason keeping them from portfolio level based on the binary or relative
linking compensation to impact. This aligns with achievement of those individual targets. See
the common discourse about ILC, where it is seen the All-or-Nothing vs sliding scale section
as too difficult and/or reductive, to create a small under Mechanism for more information on
number of metrics on which to determine com- these two approaches.
pensation for funds with a broad social mandate.
As noted earlier, composite impact scores were a
Because many incentive structures are generally common portfolio-level metric used as the basis
based on aggregate financial performance, align- for a number of ILC structures we observed. Some
ing compensation to impact means finding ways of these scores use a top-down approach,- where
to account for impact performance at a portfolio all investments are scored on the same metrics,
level. While rolling up financial performance into an while others use a bottom-up approach, where
aggregate IRR can be fairly straightforward, roll- investments are scored on metrics tailored to each
ing up ‘impact’ to the portfolio level is not always individual investment.
straightforward, particularly without comparable
and standardized impacts. One of the key findings from our research was that
the majority of funds in our ILC data set used a
When aggregating impact at the portfolio level, bottom-up approach to metrics and target-setting.
we observed funds using either a top-down or a This was particularly true for multi-sectoral funds
bottom-up approach. Within these approaches we focused on social impact.
also observed funds employing weighting meth-
ods. While the majority of ILC models we reviewed Kilara Capital: top-down approach
did roll up impact at the portfolio level, we did note using core metric for each
that not all models have this approach. We review portfolio company
all three of these considerations in this section. Kilara Capital is a A$40 million fund based in
Melbourne, Australia with a focus on climate
Top-down vs. bottom-up change mitigation. It links ILC to the growth
As noted above, the majority of ILC structures rate in tons of emissions mitigated. While
are ultimately linked to an impact metric(s) and other metrics based on the companies may
targets at the portfolio level. We observed two also be recorded, Kilara uses the growth rates
different approaches for how funds accounted for in emissions mitigated as the main proxy for
impact at this level. ILC for the businesses it invests in. To do this,
Kilara has set a 15% year-on-year target on the

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 29

 growth rate in emissions mitigated. In practice impact themes, such as circular economy, green
this would mean that a portfolio company that innovation and climate tech, and food systems
has mitigated 100,000 tonnes in one year would transformation. At investment, Chi works with
be required to mitigate at least 115,000 tonnes in portfolio companies to define up to three impact
the following year. When this minimum threshold indicators for each portfolio company that
was set, it was kept in mind that the Paris Climate will serve as a proxy for the Impact Validation
Agreements goal remains the same every year, Committee to annually assess improvement in
but the annual change required gets larger positive impact outcomes. Portfolio company
every year that global emissions reductions fall scores are aggregated into a total point score
short of targets. In light of this, requirements that determines the amount of carry awarded.
were set from the year the fund was opened
In deciding whether to use a bottom-up or top-down
(2021) when the number was 7.6% p.a. to meet
approach, funds have latitude to reflect on what is
Paris commitments, with a fixed 2x target at
fit for purpose within their own fund or funds. The
15%. Kilara’s target was set higher to account
approach may even change based on different
for changes in this target while remaining
funds’ mandates within a specific fund manager.
sufficiently ambitious, and to avoid rebasing the
target each year. This approach, which requires Impact Partners: tailoring the
using growth rates linked to scientific evidence, approach to the fund mandate
circumvents the size effects that would make Impact Partners is a European impact private
setting absolute targets problematic should equity fund manager. It target investments in
global targets change. social enterprises who create solutions to sup-
port the most fragile communities, at all stages
European Investment Fund (EIF)
of life (youth, adults and seniors), in deprived
methodology: bottom-up approach
areas (defined zones of need). Impact Partners
using portfolio company metrics and
has over €340 million under management across
impact multiples
a seed-stage fund and growth-stage funds. The
The EIF methodology is based on the gamma
seed fund has a narrow focus on creating private
model of impact metrics for fund investments
sector jobs in defined locations with higher
and is a bottom-up approach. Funds using it
need. As such, all portfolio companies report on
define up to five metrics with each portfolio
job creation and sales data (proxy for economic
company and set pre-investment targets for
activity), and compensation is tied to these
each of those metrics. The fund manager then
impact metrics at the portfolio level.
calculates and reports, on an annual basis, an
impact multiple, which is defined as the ratio By contrast, the growth-stage funds have a
between the target and realized value. The core focus on reducing inequality, which can
percentage achievement of targets determines take many forms: challenges in accessing work
award of carry on a sliding scale. In general, at opportunities, barriers to education, mobility,
least 60% of the portfolio target value needs inclusion, or other goals that are difficult to
to be achieved before any carried interest is capture in any one metric. As such, Impact
distributed to the management team. Partners took a different approach for the
growth funds, choosing instead to make an
Chi Impact Capital: bottom-up
assessment for each investment in due diligence
approach defining metrics with
to define the relevant metric(s) that measure
portfolio companies
progress towards its goal of reducing inequality,
Chi is the investment advisor of the BIIF, a
based on the portfolio company’s strategy and
Luxembourg-based impact venture fund
business model. Example metrics include the
targeting a US$30 million fund AUM. The BIIF
number of buildings made accessible to persons
invests in for-profit European-based enterprises
with disabilities and the number of unemployed
with a core-regenerative business mission to
people who have returned to work. These are
solve a burning social or environmental issue.
measured on an individual basis and rolled up to
These investments are made across several
produce a portfolio-level total score.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 30

Weighting results Opting out of portfolio-level aggregation
Our research noted fund managers took differ- Our research showed that most funds tended to
ent approaches to accounting for impact at the link compensation to portfolio impact level per-
portfolio level. Weighting “impact performance” formance, likely a reflection of a PE/VC dominant
is one approach to assessing performance of sample, where carry is awarded based on portfo-
investments of varying sizes and different stages lio performance. Despite this, there were a few
of business growth. examples of funds that based their ILC on impact
performance at the individual investment level or
Funds used different bases for weighting results.
the community level.
Some funds use an internal weighting system based
on criteria specific to the fund, where other funds The case studies below illustrate compensation
weigh impact data by the amount invested in the determined not by aggregate portfolio performance
portfolio company or the fund’s ownership percent- but on an investment-by-investment basis.
age in the portfolio company. In this later example,
Drawdown Fund: ensuring
low-dollar investments or those that take a minority
impact performance
stake would receive less weight in the fund impact
The Drawdown Fund’s total carried interest is
score than larger or majority position investments.
determined via a traditional European Equity
GAWA Capital: weighting based on Waterfall, and once the fund is in carry, 50% is
internal criteria paid out based on financial performance. The
GAWA Capital’s Huruma Fund focuses on other 50% of carried interred is tied to impact
improving access to finance and building cli- goals. The fund works with portfolio companies
mate resilience for smallholder farmers in rural to set impact targets, and assesses impact
areas of Latin America, the Caribbean, sub- performance for each company against those
Saharan Africa and Asia. The ILC methodology targets. If, on exit, the impact targets of a port-
weights performance assessment depending folio company are not met, the fund will deploy a
on whether the investment is in a dedicated proportionate share of the available carry phil-
agricultural lender or a generalist SME financier anthropically to meet those targets. This aligns
who is being supported to develop agricultural with the fund’s waterfall structure, where the
capacity. This means that it adjusts its mea- GP is paid deal by deal for impact targets.
surements depending on whether the investee
Broadstreet Impact Services:
is an agricultural lender (and therefore already
proportionate grouping of assets
has agricultural capacity) or if it is a general
For a Broadstreet-advised forestry fund, impact
financial service provider and GAWA is using
performance is assessed at the community level,
its technical assistance to help the investee
and compensation is also awarded proportion-
improve their agricultural capacity.
ately at the community level. Community-level
Vox Capital: weighting based on net compensation means that the fund manager’s
asset value compensation will be determined by the impact
Vox Capital’s portfolio-level score is calculated performance and target achievement of each
annually as the average of individual portfolio community the fund invests in, rather than by
BIA scores, weighted by NAV. For example, in looking at an overall portfolio performance. To
a hypothetical portfolio of three companies ensure this occurs, ILC is paid to the fund man-
of equal value, with BIA scores of 60, 80 and ager per community, after all investments in the
100, Vox would score 80 points on average (the community have been exited, subject to achiev-
hurdle score). If the same three companies ing the impact targets for that specific com-
instead represented 45%, 10%, and 45% of the munity. The amount of carry is proportionate
portfolio, respectively, Vox would still achieve according to the targets achieved; for example,
80 points overall. The fund’s final score, which if the fund invested in four communities and
will be taken into account to unlock the ILC, is a three achieved their impact targets, 75% of the
simple average of the scores over the fund’s life. available carry would be awarded.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 31

Conclusion
Yardstick considerations focus on the metrics and
targets chosen to link to compensation and for
many asset managers how impact is accounted
for at the portfolio level. GPs and LPs consistently
identified these considerations as the most chal-
lenging aspect of developing ILC structures. The
framework above provides a number of design
elements and examples that illustrate the differ-
ent ways fund managers have approached each
consideration. While Yardstick was identified as
the area of leading challenge, in our research we
saw clearly that there are a variety of options that
accommodate different objectives and goals in a
way that aligns with other aspects of ILC.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 32

 GOVERNANCE Decisions
Table 5: Governance decisions

GOVERNANCE DECISIONS

Designing Structures Determining Responsibilities

Oversight bodies Metrics and targets approval process

Level of LP involvement Adjustments to metrics and targets

Use of outside expertise Target, data and process verification

An effective compensation model requires robust To understand the decisions involved in creating
governance. Effective governance is essential for comprehensive and coherent governance for
establishing and upholding key decision-making ILC, we look at two focus areas for governance:
processes aligned with the organization’s strat- Designing Structures and Determining
egy and objectives. Responsibilities. Within each of these decisions,
we explore three considerations.
Governance models for ILC structures should be
a subset of the core governance model for a fund.
Therefore, when thinking of good governance in GOVERNANCE DECISIONS
the context of ILCs, funds should consider the
tenets of good governance for impact investing. Designing Structures
This includes models that ensure:
Oversight bodies
• Accountability, with a focus on fulfilling the
fund’s mission and objectives.
Level of LP involvement
• Independence, where there is impartiality and
autonomy in decision-making, and conflicts of
Use of outside expertise
interest are avoided.
• Alignment between GPs, LPs and portfolio
companies to measure impacts that are
Designing structures
In our interviews, funds repeatedly mentioned the
material. Materiality should be defined from
need to design governance structures that were
the perspective of stakeholders.
fit for purpose. Based on these responses, we’ve
• Risk management supported by clear
identified three categories to consider when
processes that identify, assess and manage
designing governance structures. These are the
risks from a financial and impact perspective.
oversight body, the level of LP involvement in
• Transparency through clear and open impact-related governance, and the use of out-
communication, disclosure of information, and side expertise.
decision-making processes.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 33

Oversight bodies its ILC mechanism relies heavily on this data
Deciding on the need for and the type of oversight (next to the achievement of the financial hurdle),
body (or bodies) to oversee ILC is one of the first set the impact data is reviewed and validated annu-
of decisions that a fund manager must make. In our ally by a separate fund governance body called
research, we saw examples of both separate impact the impact validation committee, which com-
advisory committees and LP advisory committees prises two independent, external experts in the
(LPACs) or other governing bodies with impact con- BIIF’s target impact areas.
siderations integrated into their responsibilities.
Nuveen: integrated governance
Prime Coalition: separate committee – A large, established fund manager, Nuveen’s
mission alignment committee Private Equity Impact strategy elected to inte-
Azolla Fund I is a US$239 million fund seeking grate ILC oversight into its existing governance
gigaton-scale climate impact. The Investment structures. The team was already focused on
Manager is Azolla Management Company, an ensuring that it measures impact performance
independent venture capital management on valid indicators of performance, and sets
company founded in 2021 by Prime Coalition ambitious and rigorous targets against those
(“Prime”). Prime is a US-based charity founded in indicators. To achieve this, Nuveen developed
2014 to steer and influence capital toward scal- a target-setting protocol, which it has used for
able solutions to climate change. several years to set annual targets. This year,
the Nuveen Private Equity strategy has begun
Prime’s practices for compensation and over-
working with a third party to verify that the met-
sight of investment managers are driven by its
rics are valid performance indicators, and that
need to align incentives to its non-profit mission.
the targets are sufficient. Nuveen then includes
Prime established a mission alignment commit-
target-setting in regular reporting to LPs.
tee (MAC) to ensure the fidelity of any investment
program Prime established to its charitable mis- “What we are doing is basically
sion, including Azolla.
setting a protocol for the allowable
The MAC has a minimum of three and a maxi-
ways to set targets to ensure that
mum of seven members, who are appointed by
Prime’s board of directors. Prime employees they’re sufficiently ambitious and
or directors are ineligible to sit on the MAC, but sufficiently rigorous.… Then we
representatives of Prime’s externally managed
have an external verifier who will
funds are eligible. Currently, the MAC has five
external members. come in and say on an annual basis
Because Azolla is a blended fund, 50% of car-
‘Yes, Nuveen has selected the most
ried interest is subject to the achievement of valid indicator of performance for
internal mission lock criteria. For Prime Impact this company, that is measurable
Fund, a fully charitable fund Prime established
and reasonable for them to collect,
in 2018, management incentive payments are
100% gated by achievement of the mission lock and yes, Nuveen has set sufficiently
criteria. The MAC votes to determine whether rigorous targets in alignment with
each portfolio company meets the mission lock
this protocol that you all have agreed
criteria at the time of exit. MAC members who
are representatives of the fund’s limited part- on… for this calendar year.’”
ners are recused from voting. - Pete Murphy, Head of ESG and Impact in
Private Equity Impact Investing, Nuveen
Chi Impact Capital: separate committee
- impact validation committee
Through the lifetime of each investment, Chi col-
lects and measures the impact data from each
portfolio company on a biannual basis. Because

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 34

Levels of LP involvement EIF: standard mechanism, flexible
Nearly all survey respondents with ILC reported yardstick, existing governance
that feedback from LPs about their compensation Several respondents and interviewees in our
structure was somewhat to mostly positive; a few research received anchor funding from the
said feedback was neutral. A common theme was EIF Social Impact Accelerator (SIA) or climate
the signaling effect of ILC with LPs. Interviewees mandates, which require fund managers to
noted that it “strengthened the credentials of the introduce the EIF’s social impact perfor-
fund”, “made fundraising easier” and reinforced mance methodology. The structure of the EIF
the “belief that we can deliver on our return targets mechanism is designed top-down by the LP
while serving the households we seek to benefit”. and has limited scope to vary, but it allows
fund managers complete freedom in yardstick
Despite this positive market reception, in our
decision-making (choosing metrics).
research we found that the level of input funds
receive varies considerably. In addition to tra- After the design, EIF oversight is integrated
ditional factors such as the size of the stake in into existing governance structures, with
the fund, LPs’ relevant sector experience and a focus on monitoring the achievement of
their familiarity with IMM principles and imple- the fund’s theory of change. In an internal
mentation determine their level of involvement. evaluation of the SIA conducted by the EIF
Development finance institutions (DFIs) and multi- Operations Evaluation Division in 2020, in con-
national investors seem more likely to request ILC junction with external consultants, nine of 12
and/or be comfortable engaging with funds on its fund managers interviewed “believed that the
design and governance. social impact-based carry mechanism had a
moderate or large impact on the quality of the
One of the most active DFIs in the ILC space is
monitoring of social impact.”
the European Investment Fund (EIF). As the first
LP to require fund managers to introduce ILC in “The most important thing is to stress
specific parts of their portfolio, the EIF has played
an outsized role in moving the industry towards that this [impact linked compensation
more ILC. structure] is not something to quantify
The idea to add an ILC element to the EIF’s fund- the achieved impact in absolute terms,
ing requirements came from Uli Grabenwarter, for example it is not meant to reflect
now Deputy Director of Equity Investments for the
the CO2 footprint of the portfolio
EIF. In 2012, Uli had just returned to the EIF from
a sabbatical, during which he had undertaken an manager…. The question that is asked
18-month research project with IESE business is: has the theory of change, which has
school on family offices’ approaches to impact been the basis of decision to invest in a
investing in private equity and venture capital.
Upon his return, he was tasked with building the portfolio company, materialized?... It’s
“first pan-European fund of funds for investing in not a question of how much impact has
social impact and social venture funds”. Based on been achieved in total…if you look at it
his research, he developed the EIF’s methodol-
ogy for ILC and began integrating it into this fund
across the full portfolio of the manager,
of funds. then that gives you a perspective of
how successful a fund manager is in
selecting portfolio companies that are
capable of implementing their impact
agenda and delivering on their theory
of change.”
- Uli Grabenwarter

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 35

The timing of the design of ILC is important in guiding Many interviewees noted that they would like their
the level of LP involvement. GPs that designed ILC LPs to play a more meaningful role in both ILC
ex-ante, particularly prior to fundraising, noted that design and ongoing impact-related governance,
LPs had very little involvement in governance. The particularly in challenging the fund’s assumptions
opposite was true for funds that were able to work and pushing for more ambitious targets.
together with an LP to design their ILC structure.
“On the LP side, there is a strong
New Forests: designing ILC with an LP
NF established AFIP with anchor investment opportunity to improve how the
from BII, Finnfund and Norfund. While set- whole impact investing industry
ting up the ILC structure, BII, Finnfund and thinks about and implements
Norfund engaged in a positive, outcomes-
focused discussion with NF on the design of
ILC structures. If LPs can
the mechanism and the target setting. The develop a deeper, more nuanced
design discussions were wide-ranging and understanding of ILC, they can really
covered a variety of topics. They aimed to
help drive accountability across the
strike a balance between being conservative
and ambitious, and to balance the need to test industry, and not just accountability
and learn when setting a meaningful incentive. for deployers of capital and
When it came to target-setting, this involved
investees, but also accountability to
discussions on the level of carried interest
linked to impact, ranging from 10% to 50%. The end beneficiaries.”
amount of carry tied to impact was set at 20% - Alan Pierce, Impact and Knowledge-sharing
as a result of these discussions. Manager, ALIVE Ventures
Regardless of their level of involvement in the Some funds described frustrations with the level
design, LPs can play a significant role in the gover- of or type of input from LPs. One fund manager
nance of a fund’s ILC. Impact Partners’ LPs involve- described ILC as making ‘intuitive sense,’ believ-
ment in target validation is a good example. ing in the alignment of incentives, and incor-
porated an ILC structure after negotiation with
Impact Partners: LP validating targets
an anchor LP. They expressed some frustration
Impact Partners is a European impact private
that despite having pushed for ILC, the LP was
equity fund manager. It targets investments in
relatively hands-off when it came time to design
social enterprises who create solutions to sup-
the structure. The design process took time, the
port the most fragile communities, at all stages
fund manager incurred costs; despite this, the
of life (youth, adults and seniors), in deprived
fund manager does not regret incorporating ILC.
areas (defined zones of need). Impact Partners
The fund manager believed that where an LP has
has €340 million+ under management across a
a strong interest in ILC, it should bear some of the
seed stage fund and growth stage funds.
costs involved, particularly when working with
Impact Partners’ fund managers are respon- emerging or small-scale fund managers.
sible for setting targets based on the impact
Despite this comment, there were few truly nega-
and business plan’s of the portfolio company.
tive experiences. This is likely a reflection of the
At the time of making a new investment, Impact
sample of funds that were interviewed, all of
Partners LP advisory committee will meet to
which had incorporated ILC. None of the funds we
validate the targets. These advisory commit-
interviewed that aimed to incorporate ILC failed
tee meetings have strong attendance; “...that’s
to do so.
something that they [LPs] really want to do.
Because they see firsthand the impact of the From the LP perspective, some of our LP inter-
company…the performance and the impact viewees were interested in being more involved
that we expect for each investment.” in the design and ongoing implementation of ILC
as their portfolio of investments using ILC grows.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 36

Our interviews and survey responses indicate this LPs with experience in African forestry invest-
will be a welcome development for many GPs. ments. The combination of expertise and
shared knowledge helped shape the structure
Use of outside expertise
and target-setting process.
LPs have been traditionally viewed as the gover-
nance body for oversight for traditional funds, but Many of the interview respondents reported that the
given the important role governance mechanisms use of outside expertise was essential in the design
have in holding fund managers accountable to a and ongoing governance of their ILC structure. This
fund’s dual impact and financial objectives, exper- was the case for both small funds and larger funds.
tise related to the fund’s impact objectives may Small funds said they had to spend wisely when
be needed. This can be filled by specialized staff investing in outside expertise, but they reported that
within an LP or may involve independent special- the additional input and oversight complemented
ists who can play an important role in establishing their otherwise capacity constrained teams. One
independence and preventing conflicts of interest. fund was able to use expertise in the form of an
Additionally, funds can leverage the expertise of Impact validation committee made of voluntary
the stakeholders affected by their investments, experts who helped inform its ILC governance.
i.e., the end consumers, employed workers and
casual labour, and suppliers. GOVERNANCE DECISIONS
Funds can bring in outside expertise at any point
in the design of the ILC structure or as part of Assigning responsibilities
ongoing governance. We found many examples of
fund managers who brought on specialized firms, Metrics and targets approval process
individual experts, and data from stakeholder
engagements for their insight and additional Adjustments to metrics and targets
accountability.
Target, data and process verification
Broadstreet Impact Services:
independent experts on oversight body
Broadstreet Impact Services, an impact fund Assigning responsibilities
services provider, works closely with partners The governance responsibilities in the design and
to design, launch, and/or manage investment implementation of ILC can include approving met-
vehicles. Broadstreet was engaged to design rics and targets, confirming adjustments to these
and structure the ILC, including governance metrics and targets, and can include verifying
components, of an external place-based fund. ILC data. Another important responsibility look-
The fund has three impact goals: to increase ing at the broader implications of the fund’s ILC
economic opportunity, increase community structure, including potentially perverse incen-
wealth, and increase community resilience, tives created by ILC structures. See the Perverse
but the context will vary in each community the Incentives section for more details.
fund is investing in. Broadstreet has developed Fund managers typically agree a metric and/or target-
and will sit on the impact advisory council (IAC), setting methodology with investors at the time when
alongside an expert in the specific impact area. the fund is established. Funds then use a combination
The IAC’s role in ILC is to identify appropri- of the governance responsibilities described below
ate impact metrics and set targets for each for ongoing oversight. The level of oversight varies by
community. how much engagement is required.
New Forests: leveraging previous Metrics and targets approval process
funds’ expertise A key element of governance structures support-
NF drew insights from its funds in Asia and ing ILCs is approval of the impact metrics and tar-
other funds in the market for the design of gets to be used for ILC. These approval processes
its ILC in AFIP. They also had the support of a ensure targets are ambitious but also flexible
sustainability team in Sydney and collaborated and adaptable. Governance mechanisms should

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 37

balance oversight with the appropriate level of Where there is no formal process for approving
flexibility, all while holding the manager account- metrics and targets, funds typically agree a metric
able to its impact objectives. and/or target-setting methodology with investors
at the outset of the fund. In such a case, over-
Several funds we interviewed described approval
sight typically involves reporting on (rather than
of the chosen metrics and/or targets as a key
approval of) the metrics and targets. This was seen
role in impact governance by a specified over-
both in regular reporting and as an agenda item of
sight committee.
the LPAC. An LP could, at its discretion, investigate
“When we wrote the [ILC] policy we the selected metrics or targets in more depth.
laid out very clearly which metrics Adjustments to metrics and targets
could be changed and who had In our research, participants consistently empha-
sized the fluid and evolving nature of the invest-
approval for them. Some of them ment landscape, particularly among early-stage
were at the GP level, and some of investors. As a result, goals and targets may require
them had to go to the [LPAC]...[and] adjustments throughout the investment cycle to
remain responsive to dynamic conditions. See the
the conditions for those kinds of Flexibility section on page 29 under Yardstick for
changes. If you want to change a more context and examples of how funds approach
metric or a given target, then what adjustments to metrics and targets.
are the circumstances where you In some cases, the LPA may give the fund manager
the authority to make changes at their discretion,
can do it? And also, for instance,
as long as they adhere to the LPA’s overall terms.
what happens if there’s a major When considering this model, fund managers
liquidity event? Those kinds of things should also consider earning broad stakeholder
we have documented in the policy.” buy-in to ensure the adjusted metrics and/or
targets still support the targeted outcomes when
- Kaylene Alvarez, Founder and CEO, Athena changes are made. The frequency of reviews and
Global, in reference to an advised fund means of securing stakeholder input should also
DW Markets: investment be considered.
committee playing a key role in Other models may stipulate that an advisory com-
approving targets mittee approves changes to metrics or targets. In
DWM’ Displaced Communities Fund has the some instances, these advisory committees may
primary goal of improving financial resilience consist of or receive recommendations from spe-
and livelihood opportunities for displaced and cialist consultants; they may also have some form
vulnerable persons, through a gender lens. The of LP representation.
fund has three portfolio level goals: the number
of refugees and internally displaced persons Ship2B Ventures: fund manager flexibility
(IDPs) served by the fund, livelihood improve- Ship2B Ventures allows its own team to change
ment in host and source communities, and asset the metrics and targets in its ILC structure,
and income growth of women who are served subject to approval by the Advisory Board,
directly by the portfolio company. The fund team which is made up of Ship2B Venture’s main
works with portfolio companies to set targets LPs. Proposed changes are evaluated in bian-
related to these goals. Prospective investments nual team meetings and implemented annually;
are evaluated by the investment committee, obtaining stakeholder buy-in before implemen-
which is composed of internal members and an tation is encouraged. The LPA commits Ship2B
independent director. One of the IC’s roles, in Ventures to a set of indicators from its theory
evaluating or in approving any potential invest- of change, but it offers some flexibility in allow-
ment opportunity, is to approve the impact tar- ing adjustment of targets when needed, and
gets associated with that investment. providing a 6 to 12-month period to set targets.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 38

Target, data and process verification Happiness Capital has engaged independent
Third-party verification can play an important role third parties extensively in co-creating the
in overall governance structures and in creating framework, ongoing assessment and over-
transparency, accountability and independence. sight. The framework has five steps, the last
Verification can occur at multiple points within of which is to consider how each stakeholder
ILC oversight, including at both the “front end” and responds subjectively to the venture impacts
“back end”, as well as through ongoing verifica- on the conditions and experiences of happi-
tion that may include process auditing. A fund’s ness, which will be validated through interviews
resources will typically influence the timing, pro- and surveys conducted independently by SVT
cess, and extent of verification. Group and 60dB. The interviews and surveys
will provide business insights to investees and
Front-end verification
comparable data that Happiness Capital will
Front-end verifications provide outside assurance
use to validate the assessments. This ongo-
that impact goals and targets are relevant and
ing verification process will help ensure the
ambitious as well as verifying baselines.
portfolio is generating the intended impact as
Back-end verification measured by Happiness Return.
Back-end verification certifies the underlying
This use of verification showcases how governance
impact performance data and information that
activities help inform how impact is achieved.
will ultimately determine compensation. This can
be done on exit or annually. Back-end verification Conclusion
can be used to assess whether data is correct In this section, we’ve explored considerations for
and/or agreed targets have been sufficiently met. governance structures. In many ways, the design
decisions in this category are the most crucial
DW Markets: front-end and back-
for the success of the ILC structure but often
end verification
the least explored. From our surveys and inter-
DWM asked an external impact advisor to verify
views, we’ve noted how choosing the appropriate
the baselines of its targets and metrics. Where
oversight body or determining the extent of LP
it sets targets internally, DWM selects compo-
input or external expertise can have significant
nents of the process to be validated externally.
ramifications over the years. Our research has
It also secures external verification to deter-
highlighted that the governance responsibilities,
mine it has sufficiently met impact hurdles to
including approving impact metrics and targets
unlock compensation.
and adjusting them as needed, are a critical piece
Ongoing verification of ILC design. Finally, sufficient verification is
Fund may also choose to verify performance data vital. For instance, using only back-end verifica-
related ILC structures on an ongoing basis, rather tion at exit, without front-end verification or an
than just at the time of exit and/or at the time in evaluative criterion, could inadvertently omit
which compensation is determined. assessing whether the targets or methodology
Happiness Capital: ongoing third- are sufficient. Similarly, front-end verification
party oversight used without back-end verification creates the
Happiness Capital is a private corporate venture risk that low-quality data is being used throughout
capital fund that has tied its own impact-linked the measurement period. Our research has sug-
bonus to its “Happiness Return” framework, a gested that this diverse governance approach not
comprehensive assessment conducted by SVT only aligns ILC with impact goals but also ensures
Group, a social and environmental impact con- the process is transparent, independent, and
sultancy. Happiness Return is defined as “the accountable, but more will be learned over time
impact the investment has on the objective and with evolving structures and future research.
subjective components of people’s happiness”,
and the framework is a composite score that
considers both the conditions and experiences
of happiness.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 39

Perverse incentives
Perverse incentives in the context of ILC refer In order for funds to achieve their impact objectives,
to situations where the design of compensation managing and mitigating these potentially perverse
incentives unintentionally encourages the fund incentives should be an integral part of an ILC
manager or LP to act in ways that run counter to the structure. Many of the considerations highlighted
broader goals or values of the fund. These incen- within the Mechanism, Yardstick, and Governance
tives can lead to behavior that is detrimental to the sections can serve as the basis of funds’ ability to
overall impact (and/or financial) objectives of the identify — and therefore manage and mitigate —
fund. Both GPs and LPs expressed some concerns potential perverse incentives.
about potential perverse incentives created by ILC.
Our research indicated that many funds did not
The potential perverse incentives highlighted have formal measures in place to identify and
below depend very much on how the specific ILC is mitigate these potential perverse incentives.
structured. We believe this is an important topic worthy of
further research, especially as it pertains to
• Unintended negative consequences: When
governance responsibilities.
ILC structures are overly simplistic or narrowly
defined, fund managers may take actions that
have unintended negative consequences.
See page 26 for a tangible example of this
that arose from our research. They may also
fail to consider and mitigate impact risk if
efforts to do so limit their ability to achieve
the impact targets for which they receive
financial rewards.
• Lack of continual motivation: Fund managers
may be disincentivied to focus on continual
improvements in impact once the achievement
of the overall impact target is hit.
• Misaligned incentives: When carry that is
forfeited because of impact underperformance
goes back to LPs, LPs incentives regarding
the GPs impact performance can
become misaligned.
• Cherry-picking investments: ILC structures
can encourage fund managers to prioritize
investments that have easily attainable and/
or measurable impact goals. This may lead to
overlooking opportunities with greater potential
for positive change.
• Financial goal displacement: ILC can be
structured to prioritize achieving impact
performance over the fund’s overall financial
performance. They may focus on activities
that maximize impact performance but lead to
suboptimal financial results.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 40

Fund considerations
While this report provides an overview of impact Type of fund
linked compensation using the mechanism,
yardstick and governance framework, there are Why is this important?
several factors and considerations that overlay The practice of tying impact to compensation can
all three. In this section, we discuss some of be used for any asset type and fund vehicle. The
these considerations - highlighting why they are majority of funds surveyed for this research were
important and what aspects of ILC considerations in private equity, including venture capital, but
they will likely influence. These considerations we also had respondents from private debt and
highlight issues such as the size of a fund, its real asset funds, as well as funds with non-profit
overarching impact objectives, the relationship status. We also had several LPs that use ILC in their
between proxies and financial returns, the track own company structure.
record of the fund, and how aligned LPs are to The structure of the fund, and the type of investments
the fund’s mission. These form just a subset of it makes, determine the fund manager’s ability to
recurring issues that were noted, but are likely influence investments, the return expectations,
to vary based on the circumstances of your own and how long assets are held. The type of fund
ILC structure. also influences the type of investees (e.g., early vs
late-stage, big vs small). All these factors have a
significant influence on many ILC considerations.

Table 6: Design considerations for different types of funds

Category Examples

•• Evergreen funds are open-ended funds and therefore need to define breakpoints
at which to measure and assess impact and when and how to compensate.
•• Blended-finance funds tend to have different target outcomes or return
expectations for different LPs, and thus may not apply ILC uniformly to every
Mechanism portion of the fund. As a result, they should have clearly defined mechanisms
that lay out compensation structures.

•• A buy-out fund can have significant control over portfolio companies and
therefore tie compensation to impacts they influence directly.
•• VC funds are generally expected to have ~80% of their investments fail.
VCs therefore should embed this consideration into compensation models,
Yardstick particularly where they are linked to targets at the investment level. For
example, it might not make sense to hold fund managers accountable to
impact targets for all investments, given that so many will fail.

•• Blended-finance funds aim to use strategic public or philanthropic investment,

to draw private investors to development-oriented projects or investments.
Many of the stakeholders involved tend to have different target outcomes or
return expectations, and funds will therefore need governance models that
incorporate the inputs and oversight functions of these stakeholders.
Governance •• VC funds invest in early-stage companies that have evolving business models
and therefore evolving impact objectives. These funds need to be able to
adjust metrics and targets to account for changes in the target market,
business model, and products/services of investees.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 41

Size of fund and supporting vehicles The fund’s impact objectives
Why is this important? (broad vs narrow)
In addition to a fund’s type, its size is directly related Why is this important?
to the resources that can be used to identify, A fund’s impact objectives depend on its investment
measure and manage impact. Of the funds we strategy and areas of focus. This generally
surveyed, at least 84% of the respondents paid for means that funds with narrower strategies (e.g.,
ILC-related costs in part with management fees. investments in micro-finance institutions) have
Therefore the larger the fund, the more resources much narrower impact objectives than generalist
are available. These fees can be used to cover funds, which have multiple, and typically broader,
compensation for impact experts, data collection impact objectives. The breadth of a fund’s impact
and sharing results back with stakeholders, objectives influences many ILC considerations,
impact management systems, and verification including how the fund uses outside expertise and
services, among others. whether it approaches metrics from a top-down
or bottom-up perspective.
Table 7: Design considerations for size
of fund Table 8: Design considerations for type of
impact objectives
Category Examples
Category Examples
Interviewees expressed
concerns about limited Narrow impact objectives and
capital pools for bonuses in corresponding investment
Mechanism smaller funds, a limitation not strategies may allow portfolio
expressed by larger funds. level goals to be set from
a top-down perspective,
whereas broad impact
Because of the cost, the objectives and investment
Yardstick
ability to collect data using strategies may call for setting
third parties will depend specific impact objectives at
on available resources and the investee level, to be rolled
Yardstick therefore may be limited for up to the portfolio level.
smaller funds.

Funds with narrow impact

Access to independent objectives may be able to
specialists and third-party identify individuals with
auditors that support a fund’s targeted expertise to be
governance structure will more actively involved in
depend on available resources. governance, while funds with
Governance Smaller funds may have to Governance broader impact objectives
rely on partnerships and/or might need access to a wider
volunteers to access outside range of expertise to cover the
expertise. breadth of impact objectives.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 42

Relationship between impact proxies and financial returns
Why is this important?
The scope and focus of this research prevent Funds can use proxies where there is a negative,
us from reporting on findings related to the unclear, or non-linear relationship between
relationship between impact and financial impact proxies and financial return. Although we
returns. However, our research has found that did not look in detail at all of the metrics used
the relationship between impact proxies used at the company level for those funds that used
for ILC and financial performance affects several a bottom-up approach, we generally did not
ILC considerations. Limited resources and data observe negative relationships in our GP data set;
require many organizations to use output metrics LPs, however, did raise concerns.
as proxies for impact. These proxies often have
Table 9: Design considerations for
an assumed relationship to financial performance
different relationships between impact
that can be positive, negative, or unclear.
and financial performance
The majority of ILC structures we examined
assumed that impact and financial performance Category Examples
move in lockstep. An example is the number
of customers served by an off-grid energy
organization: the more people served, the larger Where there is a perceived
the scale of both financial and impact performance. negative correlation between
This is, of course, an oversimplification of the impact and financial returns,
relationship but an example of the perceived the mechanisms a fund
Mechanism chooses can consider meeting
positive correlation between impact and financial
performance. financial thresholds first.

“Our investment strategy is

Where there is a perceived
very focused around revenue positive correlation between
alignments to impact objectives. impact and financial returns,
So when we screen companies, a number of LP interviewees
expressed interest in linking
we’re looking for companies that
more than one impact metric
generate in excess of 95% of Yardstick to compensation to account
their revenue from products or for the multiple dimensions
and/or types of impact a fund
services that generate [the] core
could have.
social or environmental outcomes
we’re seeking…. So basically, the
Where there is a perceived
company does well financially by
positive correlation between
selling more products, it generates impact and financial returns,
more impact. Because of that, we interviewees noted the
importance of governance
don’t really view much of a tension Governance
mechanisms in validating
between impact performance and impact proxies.
financial performance.”
- Pete Murphy, Head of ESG and Impact in
Private Equity Impact Investing, Nuveen

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 43

Track record LP alignment on impact
Why is this important? Why is this important?
Previous funds’ experience and impact track Several of our interviewees raised a lack of
record can inform their approaches to ILC. consistency in LPs’ approach to impact during
Experienced funds will be able to draw from their design of their ILC mechanism. As we
existing data collection systems, impact have discussed in the levels of LPs involvement
assessment methodologies, and their own section, LPs’ ambivalence to or skepticism of
lessons learned when setting up ILC models. ILC is an obvious obstacle to structuring ILC,
Those without relevant experience should plan for as are varying views on the importance of the
piloting, testing and evolution of their ILC models. funds’ impact thesis. And conversely, when LPs
agree on impact, it can be much easier to agree
“We linked bonus to our impact score on the concept of ILC as well as the supporting
in 2023 but had confidence in our governance, yardstick and mechanism details.
ability to measure impact and create Notably, only 20% of our survey respondents
an ambitious goal because of our four- without ILC cited a lack of LP interest as a deterrent
to pursuing ILC. LP alignment may also evolve
year track record in using our impact
over time. LPs that were historically negative or
score not linked to compensation.” ambivalent about ILC may become more positive
- Caitlin Rosser, Director Impact Management and/or involved over time as they gain experience
Calvert Impact Capital with ILC structures.

Table 10: Design considerations for fund Table 11: Design considerations for
track record LPs alignment

Category Examples Category Examples

A fund manager’s experience Funds with LP alignment on

and confidence in achieving impact may be able to use it
its impact targets can inform in negotiations on financial
its selection of mechanisms Mechanism hurdles.
Mechanism
and quantum of ILC.
For some LPs, ILC is a nice-to-
Fund managers without a have and not a requirement.
track record of funds with A lack of agreement by LPs
similar strategy and/or impact on the purpose of ILC could
objectives may wish to design Yardstick affect the GP’s choice of
ILC structures that employ metrics and the ambition
Yardstick flexibility in metric and target of goals.
setting while they establish a
track record. Interviewees discussed
varying enthusiasm for ILC
Fund managers without a among their LPs, which
relevant impact track record affected their willingness
may benefit from governance to engage the GP on ILC
mechanisms that play a strong Governance structure. GPs seeking high LP
oversight role in metric selection involvement in ILC governance
Governance and target-setting to ensure will need to ensure LPs agree
impacts are relevant and targets on ILC goals.
are appropriate but ambitious.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 44

Future research
ILC touches on many aspects of a fund’s operations, IMM research
and as such there are a range of additional ILC adds several potential research areas aligned
research considerations across accounting and with broader examinations in the fields of program
tax, employee motivation, impact performance evaluation and sustainable accounting. Some of
evaluation, governance and more that are relevant the concerns in the industry stem from broader
to this topic. As the field evolves, there are many problems with measurability, as highlighted in
possible future research directions, some of ‘From Fiduciary Duty to Impact Fidelity’ by Thirion
which we highlight in this section. et al. (2022). Another strand pertains to perverse
incentives and unintended consequences of
Utility and best-practice research
ILC. These consequences are not necessarily
The intent of this research was to study the GPs
negative; for example, as motivations and
who have implemented ILC and to set out a range
incentives for robust IMM may vary among investor
of practical considerations for fund managers
teams, further research could explore how ILC
who consider ILC in future. As such, this research
affects the perceived value of measurement
does not contemplate methods of linking financial
compared with other priorities. Another potential
and impact performance that have not been
avenue is the effect of ILC on strengthening the
seen in practice, nor does it make any attempt to
link between the intended impact goals and what
classify manager approaches into best practices
is being measured. Interviewees and convening
or make a determination on the usefulness of ILC.
participants also described a desire to understand
Such best practices are obvious areas for future
how to best link compensation to the achievement
study. The next five to seven years will see a rich
of outcomes.
dataset emerge, as the many fund managers in
the sample who implemented ILC in the last two One of the most commonly identified challenges
years commence cash distributions. was the difficulty of standardizing impact
measurement at the portfolio level. Initial
Incentives research consultation from Impact Frontier’s recently
Aligning incentives is a key motivation for fund released draft Impact Performance Reporting
managers who seek ILC. While this research Norms suggests that no standardized reporting
touched on examples of the perverse incentives of template will be suitable for a diverse set of
ILC, further research into incentives, their design investors, but there is considerable agreement
and governance would add depth to the discussion on the nature of information that should be
and could take many directions. For example, provided and expected by recipients, including
incentives research could investigate the effect how to approach portfolio-level reporting. With
of ILC (an extrinsic incentive) on the employee’s the version 1.0 of the Reporting Norms expected
intrinsic motivations, compared with traditional to be released for testing in 2024, future research
compensation approaches. Research could also could explore how ILC helps, improves, or hinders
explore impacts linked to compensation, which reporting efforts.
typically focus on positive impact, within the
broader context of governance oversight of all LP voice
impacts (both positive and negative). Another As part of this research, we interviewed a small
avenue to explore is the flow-through effect of sample of LPs, including development finance
ILC: where a fund has an ILC mechanism, how institutions, family offices, foundations and other
does it change contracting with and incentives institutional investors. There is much more to
for the portfolio companies? Some funds use ILC explore in the LP perspective. For one, a greater
in tandem with impact-linked finance; examining understanding of the LP perspective would benefit
this interplay, and the alignment of incentives fund managers, as we have discussed in this paper.
across multiple levels is another angle. Additionally, we know from our research that LPs

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 45

themselves are interested in implementing ILC.
While we believe many of the decisions, focus An academic research team, including
areas and considerations that we’ve identified Anne Tucker from Georgia State
in this report will be useful to LPs, there could University’s College of Law, a contributor
be another piece (or pieces) of work done on
to this report, is seeking to benchmark
implementing ILC in family offices, foundations,
ILC and the effect on governance
and development finance institutions.
and measurement provisions in fund
Evolution of ILC contracts. As the team’s work previously
As ILC continues to evolve, an analysis of the demonstrated, impact agreements have
trends would yield interesting insight into what stronger governance rights compared
works and what must adapt. Other interesting to non-impact agreements, and impact
areas include the returns on investment (how ILC attention at the fund level results in
funds compare on returns for similarly situated
stronger impact terms in portfolio
funds) and moving beyond carry to ILC for the
company agreements. Their continued
whole team.
research on impact contract terms
extends this work to ILC. Benchmarking
ILC fund contracts against other impact
contracts can provide evidence that
ILC forces attention to yardstick and
governance in the structure of the fund.
Visit impactK.ai to learn more.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 46

Conclusion
This report on impact linked compensation (ILC) The potential perverse incentives highlighted in
has sought to provide a comprehensive exploration this report serve as a reminder that ILC should
of the diverse array of ILC structures found in not inadvertently overshadow other valuable
practice. Fund managers who implement ILC impact activities or create counterproductive
are united by a desire to align incentives, foster incentives. As such, ILC should be a subset of how
accountability, and prevent misalignments such a fund approaches impact, be approached with a
as impact-washing that have sometimes plagued testing and learning mindset, and involve affected
the interests of various stakeholders in the stakeholders in design and decision-making.
investment arena. This report showcases the
With many fund managers in the sample having
adaptability of ILC, emphasizing that incentivising
implemented ILC in the last two years, this report
impact is not a one-size-fits-all approach. Rather,
should be considered first-generation data and
ILC is a customizable toolkit that funds can tailor
serve as a guide for funds contemplating its
to suit their unique missions and objectives. Yet,
adoption. ILC is a customizable toolkit, and its
given the central role of impact measurement and
effectiveness depends on how it is tailored to align
management (IMM), ILC is confronted with many
with a fund’s unique mission. But ILC should not be
of the inherent challenges and concerns of the
contemplated in isolation; its success or failure will
broader measurement field.
be determined by the investment community and
Based on the work of Reward Value, we have its commitment to transparency, collaboration,
proposed a framework for assessing ILC through and sharing data. Future research such as on best
its component parts: a yardstick to measure practices, incentives, LP perspectives, and trends
by, mechanism to link pay to performance, and over time will continue to shape the direction of
governance to ensure the mechanism is meeting ILC. The report concludes with the hope that the
the intentions. ILC mechanisms take the form work of these fund managers to align incentives
of bonus, carry or annual reviews, and depend will result in more capital being directed to the
on the fund size, structure, asset types, and achievement of more and better positive impacts.
more. In deciding a mechanism, fund managers
choose between penalties or rewards, all-or-
nothing or sliding scales, and what percentage of
compensation to link to impact. In Yardstick, we’ve
established the vital role of selecting relevant
metrics and proxies, which are accompanied by
target-setting practices, often developed at the
investee level, and aggregated up to the portfolio
level through weighting. Critical to all of this are
governance structures that facilitate alignment
and must achieve the right balance between
oversight and flexibility.

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 47

Appendix - Interviewees
• Acumen • Gaia Fund Managers
• Afrishela Investment Fund • GAWA Capital
• ALIVE Ventures • Happiness Capital
• Apollo Global Managemet • Impact Partners
• Athena Global • Kilara Capital
• Big Society Capital • Massawa Fund
• British International Investment • Mastercard Foundation Africa Growth Fund
• Blink CV • Maycomb Capital
• Blume Equity • New Forests
• Broadstreet Impact Services • Nuveen
• Builders Vision • PFC Invest
• Calvert Impact • Prime Coalition
• Chi Impact Capital • SABI Fund
• Circulate Capital • Ship2B Ventures
• Collective Action • Social Finance
• Drawdown Fund • Sweef Capital
• Developing World Markets • Vox Capital
• European Investment Fund • Weave FInance
• Fama Investimentos • Wilstar

IMPACT LINKED COMPENSATION: CONSIDERATIONS, DESIGN OPTIONS and FRAMEWORKS 48