More impact fund managers tie their compensation to impact along with financial performance

Get a weekly pulse on news and trends in impact investing with our free newsletter.

*I agree to receive marketing emails from ImpactAlpha, its affiliates, and accept our terms of use and privacy policy.
Guest Author

Aunnie Patton Power

This is the first article for ImpactAlpha about the Impact Linked Compensation Project, a research initiative exploring impact-linked compensation mechanisms, yardsticks and governance.


To incentivize impact achievements in Africa, New Forests pegs 20% of its portion of carry, or profits, to its impact outcomes. 

Impact Partners goes a step further. The Europe-focused fund manager links 100% of its carry to impact performance. Greater impact equals greater profits for the fund manager, and lesser impact equals lesser profits.

UK development finance institution British International Investment includes impact performance into investment teams’ bonus structures. 

Such impact-linked compensation approaches are used by a minority of impact fund managers and general partners; 70% of impact funds’ remuneration structures are linked only to their financial performance. Adoption of models like impact-linked carry and bonuses are important to the field of impact investing, however, because they help align funds’ financial incentives and impact performance, supporting the field for a more purposeful and aligned future. 

As interest grows, fund managers are looking for—and sharing—ways to make it easier to design funds and portfolios that account for impact achievements. 

Impact fund managers commonly cite complexity and the difficulty of standardizing impact measurement and management as barriers to integrating impact incentives into their fund structures. Forthcoming research compiled on more than 200 impact fund managers, limited partners and intermediaries shows that despite limited frameworks or established best practices, early adopters of impact-linked compensation are figuring out mechanisms to not only deepen their impact but also differentiate their funds.

Choosing an incentive model

Impact-linked compensation can act as a framework to align financial incentives and impact performance. The Impact Linked Compensation Project was launched by The ImPact in 2023, with support from the Tipping Point Fund on Impact Investing, to study early adopters of impact-linked compensation in order to understand how they’re designing, governing and measuring/managing such models (we used Reward Value’s compensation framework). Our key takeaway: there is no one-size-fits-all approach; impact-linked compensation is a dynamic process that needs a tailored approach for each fund.

The starting point for adoption is the crucial decision of choosing a mechanism that links impact performance to pay. Whether aligning impact with existing financial incentives or crafting new ones exclusively linked to impact, impact funds navigate this decision based on their unique structures and objectives. Some fund managers choose to layer impact incentives on top of existing compensation structures.

Of the hundreds of participants surveyed in our research, impact-linked carry is the most commonly-used mechanism among fund managers. Three quarters of respondents use impact-linked carry – alone or in combination with other models – because for private market funds in particular, it can be integrated in existing compensation structures and provides a familiar starting point. 

There are many other approaches, such as impact-linked bonuses and performance reviews. 

To choose a mechanism, fund managers and investors must first consider: 

  • Their existing financial incentives to determine if new compensation structures are necessary.
  • What is at stake: balancing carrot vs. stick, and choosing between all-or-nothing vs. sliding scale approaches.
  • How to operationalize impact incentives, including cost allocation, foregone compensation, and documentation and/or administration concerns.

To the first point, a fund’s organizational structure and existing financial incentives can help managers choose between embedding impact into existing financial structures or creating entirely new incentives. Then, defining the incentive timeline and understanding who should participate in it further refines this decision-making process.

  • Timeline: Each incentive model – carry, bonuses, and performance evaluations – comes with a unique incentive timeline. While impact-linked carry offers a long-term incentive at the exit from portfolio companies, bonuses and performance evaluations provide flexibility with annual or milestone-driven incentives. The timing of incentives and the stakeholders involved become essential inputs in selecting the appropriate compensation model.
  • Participation: The question of whose impact performance should be financially rewarded is a critical consideration. Impact-linked carry, while directly benefiting fund managers, may not always resonate throughout the investment team. In contrast, bonus and performance evaluations offer a broader participation spectrum, involving team members at various levels within the fund and even portfolio companies.

What’s at stake

Impact-linked compensation adopters must make fundamental choices around what’s at stake to decide the best mechanism for their fund or portfolio. Do they choose a carrot or stick? Are incentives designed to be all or nothing or on a sliding scale of impact achievements? How much compensation should be tied to impact?

  • Carrot vs. stick: Impact-linked compensation can serve as a carrot, unlocking additional compensation for impact achievement, or as a stick, forfeiting a portion if impact targets are not met. The debate often centers on whether additional carry beyond the traditional 20% should be awarded for impact achievement.
  • All or nothing vs. sliding scale: Funds must decide whether achieving the impact target unlocks the full compensation at risk (all or nothing) or if progress, not full attainment, merits recognition. Sliding-scale approaches encourage sustained impact focus, with two common structures: an impact range approach and a sliding scale based on relative performance.
  • Amount of compensation tied to impact: Setting the amount of compensation tied to impact becomes a pivotal decision. Funds report a wide range, from 5% to 100%, with 50% as the median amount, reflecting the diversity in compensation models across the industry.

Following these considerations, fund managers and investors must figure out the practical aspects of operationalizing impact incentives. This includes: 

  • Cost allocation: Who pays for the measurement and oversight of impact performance? Our research found that respondents often fund impact-linked compensation governance, measurement and management through management fees. A few respondents use technical assistance for impact measurement and management.
  • Foregone compensation: Decisions surrounding unearned impact-linked compensation money, whether carry or bonus pools, prompt considerations on where it goes. Depending on impact performance, unearned carry may return to limited partners, be distributed to another organization achieving related impact outcomes, or be directed toward the fund’s impact objectives.
  • Documentation and administration: The majority of funds document impact incentive mechanisms in their limited partnership agreements. However, concerns about flexibility and approval processes may lead to provisions being included in side letters, charters, or subscription agreements. Escrow and redistribution of unearned carry, both crucial components of impact-linked compensation, also find their place in the legal documentation.

Learning and evolving

Though impact-linked compensation structures are still a nascent and underutilized accountability and incentive tool in impact investing, interest is quickly picking up. Nearly half of the respondents in our research initiative have adopted impact incentives in the past two years. Alignment of practices and incentives and the potential for improved impact were cited as their main motivations.

Because many of these models are new, the field has few proof points and best practices. Guidelines are emerging, however. For instance, adopters advocate for integrating impact-linked compensation into a fund’s or portfolio’s overall strategy, governance and reporting, reflecting the investment strategy’s unique goals. Also: it’s important to actively involve stakeholders, including end-stakeholders, to ensure the credibility and effectiveness of impact-linked compensation structures. 

Continuous learning and adaptation are essential for effective impact-linked compensation implementation, given the evolving context of impact investing. Collaboration and knowledge-sharing between fund managers, GPs, and LPs will be crucial for establishing best practices. First-generation impact incentive models will likely evolve; the lessons learned and shared within the impact community will fuel the progression of second-generation approaches.


The Impact Linked Compensation Project is a collection of first-generation data to provide insights and offer fund managers a set of considerations for understanding impact-linked compensation within the context of their fund structures, portfolio compositions and relationships with asset owners. The upcoming report, which will be published in January 2024, aims to contribute to the ongoing evolution of impact-linked compensation in the broader landscape of impact investments.

Aunnie Patton Power is an impact fellow at The ImPact and the lead researcher for the Impact Linked Compensation Project.