How much does a chief operating officer of a $5 billion hedge fund, who does not make stock picking decisions, make when the fund generates a 10 percent return? The answer is $10M according to findings from a survey by executive search firm Boyden. The survey finds that with the compensation structure at hedge funds, even those positions which have nothing to do with a hedge funds’ investments, such as chief operating officer, have an incentive bonus clause that offers significant bonuses when the funds generate positive returns.

Compensation Structure

A hedge fund typically has a person overseeing the operations of the firm. The position holds different titles such as CEO, president or chief operating officer but the responsibility is one of ensuring the smooth running of the firm to enable the fund manager(s) to focus on research and investments.

The Boyden research finds that a chief operating officer in a typical hedge fund has a compensation structure that has three parts. One is a base component which ranges from $500,000 to $1 million in a hedge fund managing $5 billion in assets.

Chief operating officers also enjoy a fixed bonus irrespective of whether the fund generates anticipated returns in a year. This fixed bonus component is based on the management fee charged to investors on the assets managed by the firm. The research finds that a chief operating officer makes roughly $1 million to $2 million in fixed bonus on assets of $5 billion.

The third and last component is an incentive bonus paid when funds generate positive returns. According to the survey, incentive bonuses generally have no caps but a 10 percent return by a $5 billion hedge fund would net an operating officer around $5 to $10 million.

It is worth noting that hedge funds across all categories returned 9.3 percent in 2013, according to data published by HFR Research. suggesting that even in an underperforming year, hedge fund executives could pocket big money.

Deferred Compensation an Emerging Trend

The survey found that hedge fund investors are pushing for deferred compensation and other performance-based incentives to be a large component of a CEO’s compensation. While it is common for a fund manager to have a pay structure with a large percentage tied to performance, until recently operating officers at hedge funds had much of their compensation as fixed components. Commenting on this evolving trend, Kate Quinn a partner at Boyden says this trend toward performance-based incentives will make old school executives uncomfortable but adds that this is a trend that will likely stay.

The findings from the survey brings to attention the leverage that hedge fund investors currently have to force changes to the fee structure within a fund. For job seekers, this evolving trend may send mixed signals. The role of operating officers in hedge funds has become critical. A chief operating officer is responsible for the funds’ compliance with all regulatory reporting requirements. As such, the role cannot be compromised and it is likely that hedge funds would twist the compensation structure to strike a balance that is appropriate to maintain high level of motivation among its operation managers, and at the same time, satisfy investor demands.