Articles By Topic
By Topic: Compensation
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From Vol. 6 No.8 (Feb. 21, 2013)
Hedge Fund Manager Compensation Survey Addresses Employee Compensation Levels and Composition Across Job Titles and Firm Characteristics, Employee Ownership of Manager Equity and Hiring Trends
HedgeFundCompensationReport.com, a division of Job Search Digest, has published its 2013 Hedge Fund Compensation Report. Among other things, the Report provided a comprehensive look at compensation levels at hedge fund managers across job titles, by manager characteristics (including size, investment strategy and performance) and other criteria; composition of compensation; and employee compensation satisfaction levels. The Report also contained data addressing employee ownership of hedge fund managers’ equity; hiring trends; and employee concerns over job security. The Report generally revealed broad gains in average employee compensation for 2012. This article highlights selected takeaways from the Report.
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From Vol. 5 No.47 (Dec. 13, 2012)
Greenwich Associates and Johnson Associates Issue Report on Asset Management Compensation Trends in 2012
Greenwich Associates, an international research-based consulting firm in institutional financial services, in cooperation with Johnson Associates, Inc., a boutique financial services compensation consulting firm, have issued their 2012 U.S. Asset Management Compensation Report. The Report provides an overview of 2012 compensation levels and trends; discusses differences in compensation between portfolio managers, traders and analysts at hedge fund managers and other asset managers; considers the impact of new regulations on compensation; and discusses changes in compensation structures. This article summarizes key points from the Report. See also “Compensation Survey by Greenwich Associates and Johnson Associates Highlights Trends in Compensation and Best Practices for Hedge Fund Managers and Other Investment Professionals,” The Hedge Fund Law Report, Vol. 4, No. 46 (Dec. 21, 2011).
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From Vol. 5 No.14 (Apr. 5, 2012)
Former Employee Seeks Over $150 Million in Damages from Daniel Och, Och-Ziff and Affiliated Management Entities for Alleged Improper Termination
Many hedge fund managers incentivize key investment professionals and other employees to remain loyal to the firm by giving them either a profits or equity interest in the firm’s management entities. See “Key Considerations for Hedge Fund Managers in Developing a Succession Plan (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012). However, such marriages do not always end well, as demonstrated by a recent action brought by a former Och-Ziff employee against Daniel Och, Och-Ziff and affiliated management entities. The facts alleged in the Complaint offer a rare glimpse into ownership and compensation structures at one of the world’s largest hedge fund management companies. This article summarizes the factual and legal allegations in the Complaint. This article also contains a link to the Complaint, which is publicly available but difficult to obtain. For further insight into a high-level compensation arrangement (and dispute) at a successful hedge fund management company, see “Dispute between Structured Portfolio Management and Jeffrey Kong Offers a Rare Glimpse into the Compensation Arrangements between a Top-Performing Hedge Fund Management Company and a Star Portfolio Manager,” The Hedge Fund Law Report, Vol. 4, No. 8 (Mar. 4, 2011).
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From Vol. 5 No.14 (Apr. 5, 2012)
Recent Decision Holds That Hedge Fund Managers Have Some Recourse Against Firm Employees That Engage in Insider Trading and Deceive Their Employers Pursuant to the Mandatory Victims Restitution Act
Hedge fund managers compensate their employees for services rendered with the expectation that such services will be rendered with competence, integrity and honesty. However, when employees fail to live up to these expectations, do hedge fund managers have any recourse? For example, may managers claw back compensation paid to such employees and recoup costs incurred in investigating and defending against securities fraud claims? A recent decision by the U.S. District Court for the Southern District of New York suggests that, yes, hedge fund managers may in fact have some recourse against rogue employees.
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From Vol. 4 No.46 (Dec. 21, 2011)
Compensation Survey by Greenwich Associates and Johnson Associates Highlights Trends in Compensation and Best Practices for Hedge Fund Managers and Other Investment Professionals
In November 2011, Greenwich Associates, an international research-based consulting firm in institutional financial services, and Johnson Associates, a boutique compensation consulting firm specializing in financial services, published their U.S. Asset Management 2011 Compensation Report (Report). The Report projects compensation levels and trends for hedge fund professionals and other investment professionals for 2011. The projections are based on historical data gleaned from more than 1,000 interviews with financial professionals in fixed-income and equity investor groups at hedge funds, mutual funds, investment management firms, insurance companies, banks, government agencies and pensions and endowments. The Report dissects and compares historical compensation data for 2009 and 2010 from various perspectives. (For another discussion of compensation levels and trends in 2009, see “Infovest21’s Annual Hedge Fund Manager Compensation Survey Reveals Top Paid Manager Positions and Top Factors Affecting Performance,” The Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).) First, the Report highlights differences in compensation levels among fixed-income and equity investment professionals. It then contrasts compensation levels for hedge fund professionals versus their counterparts at traditional asset management firms. It then discusses trends in performance-based compensation and deferrals of compensation. The Report also reveals trends in compensation for sales professionals and outlines best practices for structuring compensation of sales professionals. For more on compensation of sales professionals, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation,” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011). This article discusses the data and analysis contained in the Report and outlines the Report’s projections for 2011 compensation levels.
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From Vol. 3 No.30 (Jul. 30, 2010)
Heidrick & Struggles Report Details Compensation Numbers and Employment Contract Terms for Hedge Fund Marketing Professionals, Risk Managers and CCOs, and Outlines Industry Trends
On July 27, 2010, Heidrick & Struggles International, Inc. (Heidrick), a leadership advisory firm providing global executive search and leadership consulting services, released its Report on Hedge Fund Industry Trends for 2010. “The hedge fund industry is turning on its head – with regulatory and distribution pattern changes having a big impact on talent in the sector,” said Daniel Edwards, co-author of the Report and newly appointed U.S. Hedge Fund Sector Leader for the firm. (For this and other recent personnel changes at Heidrick, see the People Moves section of this issue of The Hedge Fund Law Report.) The Report makes general market observations regarding the U.S., European and Asian hedge fund markers; outlines talent trends; reviews hedge fund manager employee contract terms and compensation numbers; and includes sections on launches and liquidations as well as the regulatory outlook. This article reviews the key take-aways from the Heidrick Report.
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From Vol. 3 No.9 (Mar. 4, 2010)
California Appellate Court Affirms $19 Million Arbitration Award Against Russel Bernard, Former Principal of Hedge Fund and Private Equity Fund Manager Oaktree Capital Management
On February 22, 2010, the California Court of Appeal for the Second District affirmed a Los Angeles Superior Court order confirming an arbitration award against Russel S. Bernard, a former principal at hedge fund and private equity fund manager Oaktree Capital Management, L.P. In an incentive fee dispute between Bernard and Oaktree, an arbitrator had found that Bernard breached his fiduciary duty to Oaktree when, in his role as fund manager, he stalled the launch of a new fund and appropriated an investment opportunity in order to form a competing private equity fund, Westport Capital Partners. The arbitrator awarded Oaktree $12.3 million for the management fees it lost from the delayed venture, as well as $6.7 million in attorney’s fees, costs and interest; it also refused Bernard’s demand for payment of incentive fees based on his performance before his resignation. The appellate court “affirm[ed] the award because [Bernard] did not satisfy the narrow grounds for judicial review of an arbitration award.” We summarize the background of Oaktree’s action against Bernard and the California appellate court’s legal analysis.
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From Vol. 3 No.8 (Feb. 25, 2010)
Federal District Judge in Texas Dismisses Former Executives’ Employment Contract Dispute Against Hedge Fund Firm D.B. Zwirn & Co. Over Unpaid Bonuses
Representing a new trend in hedge fund litigation created by the recent financial crisis, various former hedge funds executives have been suing their former employers or partners for unpaid or allegedly unpaid bonuses or other compensation. See, e.g., “Co-Founder of Hedge Fund Manager Camulos Partners Sues Other Co-Founder for $67 Million in 'Unlawfully Seized' Bonuses and Investments,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010); “New York Appellate Division, First Department, Affirms Dismissal of Breach of Employment Contract Claim Against Hedge Fund Manager Stanfield Capital Partners,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010); “Minnesota Appeals Court Affirms that Repeated Oral Representations Preclude Limitations Defense in Hedge Fund Manager’s Claim for Unpaid Bonuses,” The Hedge Fund Law Report, Vol. 3, No. 2 (Jan. 13, 2010); “Touradji Capital Management Countersues Ex-Hedge Fund Portfolio Managers,” The Hedge Fund Law Report, Vol. 2, No. 46 (Nov. 19, 2009); “New York State Supreme Court Upholds Former Portfolio Managers’ Claims Against Hedge Fund Manager Touradji Capital for Breach of Contract and Intentional Infliction of Emotional Distress; Dismisses Remaining Causes of Action,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009). In this instance, on February 8, 2010, the United States District Court for the Southern District of Texas summarily dismissed a lawsuit over unpaid bonuses brought by plaintiffs Todd A. Dittmann and Susan Chen against their former employer, defendant hedge fund firm D.B. Zwirn & Co., L.P. (DBZ). The litigation began in February 2009, when Dittmann, and later Chen, filed complaints against DBZ claiming it had breached their respective contracts for employment compensation, and adding causes of action including, among other things, fraud, quasi-contract and violations of the New York State Labor Law. In rejecting the lawsuit, the District Court concluded that plaintiffs “worked in a high risk industry with the potential for high rewards[,]” received suitable compensation for several years, and that, in 2007, when “DBZ’s business declined through no apparent fault of the Plaintiffs, DBZ reduced their bonuses and ultimately failed to pay, “all in compliance with the terms of the[ir] employment agreement[s].” We detail the background of the lawsuit and the court’s legal analysis.
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From Vol. 3 No.4 (Jan. 27, 2010)
Co-Founder of Hedge Fund Manager Camulos Partners Sues Other Co-Founder for $67 Million in “Unlawfully Seized” Bonuses and Investments
On December 30, 2009, William Seibold, an investor in hedge fund Camulos Partners LP, and an equity interest holder in hedge fund manager Camulos Capital LP and fund general partner Camulos Partners GP LLC, sued the Camulos entities and their controlling individuals for over $67 million in the Delaware Chancery Court. His complaint alleges that the defendants, through a “calculated scheme and brazen abuse of power,” forced him out of the management partnership and “deprived him of millions of dollars of his investments, compensation and equity.” His sixteen-count complaint includes claims for statutory theft, conversion, unjust enrichment, breach of contract, tortious interference with contract, breach of fiduciary duty and civil conspiracy. This article summarizes the primary factual and legal allegations in the complaint.
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From Vol. 3 No.3 (Jan. 20, 2010)
IRS Issues Guidance on Compliance with Section 409A Requirements Applicable to Deferred Compensation Plans of Hedge Fund Managers
In 2004, as part of the American Jobs Creation Act, Congress amended the Internal Revenue Code to include Section 409A, which generally requires recipients of deferred compensation to elect the time and form of deferred compensation payments in a manner that complies with Section 409A and Sec. 1.409A-1(c) of the Income Tax Regulations. Failure to elect time and form properly, or utilizing an acceleration of deferred compensation payments, can subject the employee, director, independent contractor or other “service provider,” which may be an individual, corporation, partnership or limited liability company, to an additional 20 percent income tax, accelerated taxation of the deferred payments and heightened interest assessments. Section 409A was enacted in response to the corporate scandals of the early Naughts, such as Enron, Tyco and WorldCom, and was intended to curb the practice of executives deferring large amounts of compensation and to eliminate the ability of executives to vary the payment schedule by which they received deferred compensation. In attempting to curb these perceived “evils,” Congress, in enacting Section 409A, created a statute that is hyper-technical in its application, with harsh penalties for noncompliance. Hedge fund managers, who may be considered “service providers” under the statute, should examine compensation plans that include any form of deferred compensation, including deferral of management or performance fees, for compliance with Section 409A. Because the penalties for noncompliance are harsh, the Internal Revenue Service (IRS) has issued guidance on correcting plan failures. In 2008, the IRS provided guidance on operational failures. However, on January 5, 2010, the IRS issued Notice 2010-6, which provides guidance on correcting document failures. Both notices provide guidance relevant to hedge fund managers and should be closely examined. This article examines the scope of Section 409A and Notice 2010-6 and details the applicability of both to hedge funds and hedge fund managers.
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From Vol. 3 No.3 (Jan. 20, 2010)
Federal District Court Denies Summary Judgment to J.P. Morgan Chase as to Whether Its Hedge Fund Accounting Business Employees Were Exempt from Fair Labor Standards Act Overtime Pay Requirements
Plaintiff Damian Hendricks (Hendricks) was a “Fund Accounting Specialist” in the “Hedge Fund Services” business of defendant J.P. Morgan Chase Bank (JPMorgan). Plaintiff Michael Minzie (Minzie) was a “Fund Accounting Analyst” in that business. They performed various services in connection with JPMorgan’s preparation of financial statements for hedge fund clients. Both were paid a weekly salary and were eligible for bonuses. They claimed on behalf of themselves “and on behalf of other similarly situated individuals” that JPMorgan failed to pay them overtime in violation of the federal Fair Labor Standards Act (FLSA). Following discovery and depositions, JPMorgan moved for summary judgment, claiming that Hendricks and Minzie were exempt from the FLSA overtime requirements because they were both employed in bona fide professional and administrative capacities. In a decision that serves as an excellent primer on the applicability, in the hedge fund context, of exemptions from overtime pay under the FLSA and the analogous Connecticut law, the district court denied the motion, holding that there were significant issues of fact as to the nature of the employees’ duties. We summarize the factual allegations and the court’s decision.
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From Vol. 3 No.2 (Jan. 13, 2010)
Minnesota Appeals Court Affirms that Repeated Oral Representations Preclude Limitations Defense in Hedge Fund Manager’s Claim for Unpaid Bonuses
On December 29, 2009, the Minnesota Court of Appeals affirmed that a hedge fund manager’s claim for overdue, unpaid bonuses was not barred by the statute of limitations because: (1) the owing party orally acknowledged, and thus extended, the due date for the bonuses; and (2) the owing party was equitably estopped from asserting this defense because the manager reasonably relied on those representations when he spent large sums to build a house. However, the appellate court reversed a $126,352 award of fees and costs to the hedge fund manager, finding that the lower court abused its discretion in awarding those fees and costs. This article offers extensive detail on the factual background of the case and the court’s legal analysis.
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From Vol. 2 No.50 (Dec. 17, 2009)
Infovest21’s Annual Hedge Fund Manager Compensation Survey Reveals Top Paid Manager Positions and Top Factors Affecting Performance
Infovest21, LLC, an information services company for the hedge fund industry, conducted its eighth annual executive compensation survey of hedge fund managers in the fall of 2009. The survey aimed to: (1) analyze the compensation structures of hedge fund managers during the current year; and (2) examine major trends as perceived by fund managers. It analyzed results separately for those managers with assets over $1 billion and those with assets under $1 billion. This article focuses on the salient findings from the former category, addresses the survey’s approach and methodology and describes the profile of the respondents surveyed (including an analysis of recent cost cutting efforts). Importantly, this article also details compensation trends for employees at various levels at hedge fund managers, factors affecting compensation and the impact of asset size on the survey findings.
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From Vol. 2 No.45 (Nov. 11, 2009)
Hedge Fund Managers Considering Fund Appreciation Rights Compensation Structures to Defer Tax on Performance Compensation and to Better Align Manager and Investor Incentives
In the public company context, before stock options got a bad name via backdating scandals and unintended consequences (a skewing of incentives towards the short-term, unintended windfalls, etc.), they were seen as a potent tool for mitigating the adverse effects of the oft-bemoaned separation of ownership and control. Executive compensation debates, however, are not the exclusive province of commentators on public companies. The credit crisis focused the attention of hedge fund investors on executive compensation at hedge fund managers in a way that good times never could. See “Addressing (and Resisting) Demands for Changes in Hedge Fund Manager Compensation,” The Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009). As distinct from discussions of executive compensation at public companies, where the chief criticism often relates to the absolute level of compensation, hedge fund manager compensation discussions more often relate to the structure of compensation. In particular, one of the primary criticisms leveled during the credit crisis was that measuring performance fees over one year failed adequately to reflect the reality of most hedge fund investment strategies, which require more than one year for realization. Similarly, the idea of measuring performance compensation over a single year has been criticized as incentivizing managers to take undue risks and for potentially rewarding negative performance over multiple years. In an effort to better align the incentives of managers and investors, hedge fund managers have been evaluating the viability of fund appreciation rights (FARs), which offer a mechanism of manager compensation analogous to stock options. This article explores this provocative compensation structure, and includes analysis of: the mechanics of FARs; the analogy to call options; how FARs may offer the potential to better align the incentives of managers and investors; the clawback mechanism often built into FARs; a numerical example of how a FARs structure could operate in practice; how FARs can help retain talent, especially in lean years; whether FARs can be used in existing funds in addition to new funds; whether FARs can be used in domestic funds in addition to offshore funds; the tax consequences of FARs; and the market interest in FARs.
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