By Steve Cohn
For decades, the cash bonus has been the most highly valued
tool for talent management. Recently, however, hedge funds have
begun to recognize that compensation policy can be even more
effective. In the future, we believe that reward--of which
compensation is merely one aspect--will be considered even more
Hedge funds recognize that, to maintain competitive
advantage, they need unique strategies and the human capital to
support them. The primary challenges that they face are
acquiring, managing and retaining the people who deliver that
human capital. Some firms have developed cultures around talent
management. Others have tried to use specific human resources
policies (e.g., non-compete clauses) to hang onto talent.
However, unless they have properly rewarded their employees,
their people strategies have been unsuccessful.
Why do some funds fail to reward their employees properly?
Often, they fail to understand the underlying psychological
processes that drive workplace behaviors. They treat employees
as if they were investors, putting time into work with the
expectation of generous return on investment. They perceive
that "cash is king" and that those who receive large cash
bonuses must feel like they have been knighted. In reality,
most professionals are looking for fairness. They want to be
given every opportunity to succeed and, if they do, they expect
to be paid fairly for it. When employees perceive
injustice--whether in policies, practices or actual
rewards--their attitudes grow negative and they withdraw from
work. Their performance declines. They begin to seek employment
outside the firm.
When organizations attempt to manage talent with large
bonuses alone, turnover is high whenever firm-level performance
is poor. It may not be possible to pay employees well every
year, but it is possible to pay them fairly. Fairness, though,
is a perception. What can hedge funds do to create the
perception of fair reward?
We prescribe the following actions:
A hedge fund should be as transparent as possible about its
compensation policy, both during the hiring process and in the
employment contract. Funds that determine bonuses according to
formulas have been highly successful at luring top
professionals away from banks and direct competitors. However,
funds that clarify their compensation policy to candidates give
themselves the best chance to hire and retain top
professionals. For example, one U.S.-based hedge fund (with
over $12B in AUM) takes great care to delineate how incoming
portfolio managers' percentage payouts are affected under
various scenarios. If the PM's fund returns 10%, the PM will be
paid 10% of profit and loss. If the fund returns 11%, the
individual payout will rise to 11%. However, if P/L is lower
than 10%, the PM's bonus will be discretionary. As a result of
the clarity of its compensation policy, this fund has been more
effective in managing talent than its competitors.
The employment contract should be as employee-friendly as
possible. Too often, some hedge funds take the unfortunate view
that these contracts should be embedded with harsh "retention"
policies (e.g., unnecessarily long non-competes). These funds
face great difficulty in recruiting top talent, particularly
when they are in early stages of development. Organizations
should carefully consider the underlying assumptions behind
these policies and whether, for example, they can offer
"carveouts" ( e.g., situations under which non-competes do not
apply). For example, one hedge fund recently specifically
defined a "competitor" in a non-compete clause and listed the
kinds of firms for which the newly-hired professional would be
eligible to work.
Compensation policy should be as uniform and stable as
possible across professionals of similar qualifications and
performance. Where there are differences between roles, or when
changes to policy are made, there should be a clear rationale
that is shared openly with portfolio managers. However, some
funds offer different compensation "deals" to their PMs,
without offering concrete reasons for the differences, and make
seemingly indiscriminate changes to compensation policy after
PMs have joined. These violate the "psychological contract"
between employer and employee and lead to high turnover.
Hedge funds should take broader views of compensation.
Recently, many have begun using benefits as additional tools
for talent management. We recommend that they not only
benchmark their policies against their competitors but also
look at ways in which they can distinguish themselves. However,
it is critical that funds consider how well their benefits
complement their people policies.
Finally, fairness in compensation is just one aspect of the
overall idea of reward. We recommend the amplest definition of
the term, which includes training and development, job
enrichment, positive feedback and many other progressive
practices. In fact, in a recent compensation survey, we found
that on-the-job learning is a greater determinant of both
satisfaction and turnover intentions than perceptions of fair
compensation. Organizations that work hard to provide rewarding
work experiences, in addition to fair and transparent
compensation policies, will find their employees more
satisfied, committed and productive.
Steve Cohn is an executive director at Options Group, a global
executive search and strategic consulting firm headquartered in