Lawyers, Funds and Money: The Meeting of Finance and Employment

The intersection between the world of complex financial products and employment/partnership disputes brings up significant issues that must be thought through when a partner, key employee or group of employees joins or leaves a hedge fund or financial institution. Issues of performance, valuations of complex derivatives, holdback of bonuses, and non-competition provisions must all be considered. Even if litigation does not ensue, and the separation is peaceful, these issues must be worked out among the parties. This article highlights some of the considerations implicated by these disputes.

Compensation Offered Key Employees

Many employers within the financial services industry look to attract employees by offering rich compensation packages, which in today’s marketplace are far more extensive than a base salary and a discretionary bonus. In the hedge fund context, employers routinely offer portfolio managers incentive compensation based on the fees paid by the investors—the incentive fees, the management fees,¹ or both—without being given an equity interest in the fund. Fee-based incentive compensation is most often calculated net of management company and fund-related expenses. In structuring such an arrangement, an employer might limit a particular portfolio manager’s incentive compensation to just those fees relating to his/her portfolio or fund. The incentive compensation formula may be negotiated as a straight percentage of the fees, or the percentage may vary based on calendar year/length of service or amounts under management.