D.E. Shaw
D.E. Shaw was founded by David Shaw more than 30 years ago.
- D.E. Shaw in April asked employees to sign non-compete contracts by mid-September. The hedge fund manager had "no-solicit" contracts before, but hadn't required non-competes for all investment staff.
- The firm has since made the original non-compete contracts more employee-friendly by changing how deferred compensation is paid out, sources inside the firm told Business Insider.
- The non-competes also give investment staff the option of walking away from the $50 billion hedge fund manager with all deferred compensation paid out immediately, adding to the already-high stakes D.E. Shaw is facing to retain talent.
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D.E. Shaw has relaxed terms of its deferred compensation structure ahead of a mid-September deadline on the firm's new non-compete contract for all investment staff to either sign the agreement or get fired, insiders said.
The move spotlights uncertainty inside D.E. Shaw as it prepares to enforce wide non-competes, which are fairly common in the hedge fund industry, for the first time in its 30-year history. At stake is the $50 billion hedge fund manager's investment talent - sources told Business Insider how long-time employees are assessing the terms and weighing if it makes sense to get pushed out and join a competitor.
Three people currently asked to sign non-competes at D.E. Shaw told Business Insider they have not yet signed the agreement and described wider pushback from staff. They also said they viewed the changes to the deferred compensation structure as a bid by senior management to get more people to sign.
The Financial Times first reported in the beginning of June that D.E. Shaw had set a mid-September deadline for workers to sign non-competes. On July 23, D.E. Shaw told workers they had revised the terms of the deferred compensation plan for employees that leave the firm voluntarily, including letting employees keep more of their deferred compensation as long as they wait out their non-compete timeframe between jobs, several sources told Business Insider.
Before April, the firm's employment agreement only required non-solicit agreements, meaning employees that left had to hold off on recruiting former colleagues and investors. D.E. Shaw had told staff that a non-compete put it in line with the broader hedge fund industry, according to the FT report.
To be sure, the three insiders also told Business Insider that they knew of colleagues who had signed immediately once the original terms were revealed. And a source familiar with the firm's senior management tells Business Insider that "dozens" of employees are returning signed contracts weekly.
D.E. Shaw declined to comment when asked by Business Insider about the employee response to the non-compete and changes to the contract.
Jason Zuckerman, a Washington-based lawyer that has represented hedge fund employees in contract disputes, said that adding a non-compete after the fact to an employee contract is relatively uncommon. New York law requires non-compete clauses to "be no greater than needed to protect the legitimate interest of the employer," he said.
The three people working at D.E. Shaw also noted that people could leave the firm with their entire deferred pay intact if they did not sign the agreement, giving them optionality to wait right up to the deadline and take advantage of a better opportunity.
"We see it as a type of career 'put' option," one person said. "Anyone who wants to bet on themselves is not going to sign."
In the FT report in June, the firm denied that the non-compete deadline was related to the departure of former D.E. Shaw managing director Dan Michalow. His non-solicit agreement runs out the same day employees will be required to sign non-competes, after which Michalow would be able to recruit D.E. Shaw investors and employees if he were to start his own venture.
Michalow was fired last March after an investigation into claims of inappropriate behavior, but he has fought how the departure was characterized and filed suit against the firm for defamation. He declined to comment for this story beyond pointing to a memo to employees D. E. Shaw's Executive Committee sent last year about his departure.
The non-compete timeframes D.E. Shaw is asking employees to agree to range from three months to a year, meaning they can't start a new job until that time expires. But even under the new compensation terms, unless employees don't take another job for three years, they won't collect all of their deferred pay.
During the non-compete period, D.E. Shaw pays employees 150% of their salary and continues to provide health insurance, a source familiar with the agreement said, which are both generous compared to industry standards.
The sources inside the firm who have not yet signed said that their focus is on the deferred compensation, however, because most of their total pay - as common in the hedge fund industry - is paid out in bonuses that go into the deferred pool.
While other high-profile hedge funds also pay deferred compensation out over several years, most pay the full amount as long as the non-compete timeframe is completed, according to two industry sources and one source at D.E. Shaw.
"It used to be that they kept your money, and that was your incentive to not leave, while other firms kept your time," one source inside the firm said. "Now, they keep your money and your time."
In the latest version of D.E. Shaw's deferred compensation plan, if an employee leaves voluntarily, their deferred compensation is paid out at year-end over three years. If they start a new job after the non-compete period expires, they forfeit any compensation they have not yet received.
Under the terms of the long-running deferred pay plan, an employee who started working at another hedge fund in the same calendar year that they left D.E. Shaw would forfeit any deferred compensation owed up until that point - even if they waited out the new mandated non-compete time period.
The people working at D.E. Shaw said they had felt pressured to sign without being able to offer feedback, with one person saying they felt there was a "double standard" with regard to how staff was expected to perform strategically in their jobs versus making decisions about the contract.
The three people at the firm described the new deferred comp as an improvement from the employee perspective, but said there was still a feeling of uncertainty around how many people would ultimately agree to the non-compete.
"It's a little bit of a golden ticket," a source inside the firm said of the ability for people to keep their deferred compensation if they don't sign. "It's basically let everyone go out and get a market check on what they're worth."
