Here’s How Steve Schwarzman Gets Paid

Steve Schwarzman, the head of the Blackstone Group, is one of the richest men on Wall Street. But the way he makes his hundreds of millions annually is not easy to divine from Blackstone’s public disclosures.

So here is an attempt to explain it. The information is all contained in Blackstone’s annual 10-K form, which it filed on Friday. But Blackstone buries the good parts and forces reporters to do a number of calculations to come up with the headline number. In this case, that’s a $690 million payout for 2014.

First you have to understand how Blackstone works. Its corporate structure is incredibly complicated, partially for tax reasons, but it can be thought of like this: Blackstone itself is a “general partner” (GP), which makes money by managing funds that it raises from “limited partner” (LP) investors. The funds invest in things like private companies, real estate or corporate debt. Blackstone collects 2 percent of the capital under management as a management fee, and it collects 20 percent of the profit that the funds earn (after the profit crosses a certain threshold).

This 20 percent of profit is called “carried interest,” or “carry.” That’s the primary way Blackstone gets revenue. (Though management fees are an increasing slice of revenue, now that Blackstone manages so many billions.) One way to think about carry is: getting part of the upside from an investment without having to put a commensurate amount of capital at risk.

So how does this carry make its way into Schwarzman’s bank account? Two ways.

1. Stock ownership. Schwarzman was one of the two founders of Blackstone in 1985. He still has a 45% stake in the company, as you can see on page 253 of the 10-K. Technically, his stake is in a holding company (more detail on that is on page 259). This gives him a slightly higher annual dividend than common shareholders get: $2.46 per share in 2014, versus $2.12 per share for common shareholders. The dividend, or “distribution,” comes from Blackstone’s profit, which comes largely from carry.
2. Participation in the carry pool. In smaller private equity firms (ones that aren’t publicly traded), the partners own the general partner entity and allocate the carry among themselves. The structure is a little different in Blackstone’s case, but the outcome is similar. At Blackstone, carry goes into a pool. Some of it then goes to the executive officers, including Schwarzman. You can think about that as a compensation expense. After employees are paid, the carry flows into profit, which goes to shareholders (see item No. 1).

Schwarzman also got a $350,000 salary, which derives from management fees. And he got $613,876 worth of restricted shares of BXMT, which is Blackstone’s publicly traded real estate investment trust. These two items become rounding errors in the context of his overall payout.

Finally, Schwarzman also gets profit from his personal investments in Blackstone’s funds. (In this capacity, he’s a limited partner.) For 2014, Schwarzman got $33.5 million from this source (page 261 of the 10-K), which includes profit and his invested capital being returned. Blackstone doesn’t say how much of that figure is profit versus returned capital.

Here’s how you calculate his total bounty.

(231,924,793 shares)($2.46 dividend)=$570,534,990.78

+

carry, salary and BXMT shares, which Blackstone helpfully sums on page 237, of $85,888,640

+

net distribution from personal investments in Blackstone funds of $33,500,000

= $689,923,630.78

Schwarzman did not receive a bonus.