Asset-Managing In-House Counsel Need Clarity on Compensation

Key Findings

As legal and compliance leaders at alternative asset managers take on broader strategic responsibilities, long-term incentives are becoming an increasingly important part of their compensation. In his Bloomberg Law op-ed, Dimitri Mastrocola argues that firms must pair these increasingly complex awards with greater clarity so candidates and executives can understand and appropriately evaluate their value.

• More than half of the GCs, CLOs and CCOs surveyed by MLA and Allvue receive some form of long-term incentive, reflecting their expanding role within the business.
• Transparency remains a challenge, with only 44% of respondents agreeing that their firms clearly explain how long-term incentives are allocated.
• Candidates are asking about long-term incentives early in the search process, sometimes before base salary, making clarity an important part of evaluating competing opportunities.
• Firms can improve transparency without projecting uncertain future values by explaining what an award recognizes, how it vests, who determines allocations and how it fits into the total compensation package.
• When candidates cannot easily assess a long-term incentive, the award may carry less weight in their decision than the firm intends.

As legal departments continue moving to the center of the business, that shift is especially visible at alternative asset managers, firms that invest in non-traditional asset classes outside of standard public stocks, bonds, and cash.

General counsel, chief legal officers, and chief compliance officers at these firms now work on fundraising, product design, and enterprise-level decisions alongside their legal and regulatory responsibilities. And how they are compensated has changed with their growing mandate.

A recent survey by Major, Lindsey & Africa and Allvue of 157 GCs, CLOs and CCOs at US-based alternative asset managers found that more than half receive some form of long-term incentive that has traditionally been reserved for investment professionals and senior operating executives. Economic participation has expanded to legal and compliance leaders, reflecting greater recognition of the contribution they make across the business.

As these long-term incentives become more common for legal and compliance leaders, the pressing question is how firms explain these awards to the legal and compliance leaders receiving them. If a candidate can’t understand the compensation they’re receiving, it becomes more difficult to value or compare it against a competing offer.

This is where the data show more tension. For instance, only 44% of respondents agreed that their firm clearly explains how long-term incentives are allocated, while 35% disagreed and the rest were neutral. Meanwhile, 45% disagreed that carry or performance incentives are allocated fairly to legal and compliance relative to other functions, compared with 30% who agreed.

Clearer communication can help a participant understand and evaluate an award. It doesn’t necessarily resolve a disagreement about the allocation itself. A GC, CLO or CCO can understand how a decision was made and still believe legal and compliance received too little relative to other functions.

This stems in part from the fact that firms build incentive structures faster than they build the governance around them. In our searches, candidates ask about long-term incentives early, often before base salary. They want to know how allocation decisions are made.

Asset managers have legitimate reasons to be cautious. Carry is hard to value in advance, and no firm wants to put forward a figure it may not be able to honor. Some allocation information may be sensitive. Firms can still explain the structure, decision process, and terms that are already settled without projecting a future value or disclosing every internal allocation detail.

In that vein, there are a few practical points that alternative asset managers should keep in mind.

Explain what the award is meant to recognize. The reasoning is just as important as the number itself, especially if the firm can’t commit to a specific figure. Be sure to tell the GC, CLO or CCO why they received this award, why now, and what it acknowledges about the scope of their role.

Give the person enough to know what they hold. They should be able to identify which fund or pool the award comes from, how it vests, and what happens to it if they leave. They also should be able to find current information without having to ask for it.

Say who decides and what they weigh. Name the people who make allocation decisions, describe what those decisions take into account, and explain the circumstances under which an award might be revisited if the role changes.

Explain the award as part of the full compensation package. Show how the long-term component relates to salary and bonus so the candidate can evaluate the offer.

Firms in this market already understand that pay at this level reflects the breadth of the role. The same care should apply to how that pay is explained. In our searches, a long-term award that is difficult for a candidate to assess can carry less weight in the offer decision than the firm intends.