Inside hedge fund DE Shaw's compensation structure and employment contracts

DE Shaw, founded in a New York bookstore in 1988, manages about $65bn in assets and employs roughly 2,500 people. According to eFinancialCareers, the firm was the world's most profitable hedge fund last year and has generated returns above 9% in the year to August, compared with 4% at Citadel and 3% at Millennium. Former employees have historically spoken positively about the firm and rarely leave, but a former managing director challenges the idea that this reflects its culture.

Dan Michalow, who joined DE Shaw from Harvard at 21, founded its structured credit group at 25, made partner at 29, and ran the macro trading group before leaving in 2018, alleges that the firm uses unusually restrictive employment contracts. In 2022, a FINRA panel ordered DE Shaw to pay him $52m after determining the fund had defamed him by claiming he was fired for sexual harassment and committed "gross violations" of its standards and values. DE Shaw said at the time it was "disappointed" with the outcome and supported its decision to terminate him. Michalow says he was earning up to $40m a year when he left and that the firm withheld $14.4m of deferred compensation that he has still not received.

Michalow is contesting the mechanism by which he says the firm withheld his pay. He alleges DE Shaw requires employees to sign an initial contract permitting the withholding of part of their pay, along with a later "release" that waives legal liability for events during employment and for three years after departure. In a filing with the New York Court of Appeals, he says this "release for pay" requirement applies even where employees allege sexual harassment, racial victimisation, or an intentional tort by the firm, forcing a choice between deferred pay and complaints. He says that refusing to sign meant he did not receive the money. If he succeeds in contesting the scheme, he would regain the $14.4m, and other employees could avoid signing such contracts.

Michalow's complaint also describes his pay as a "guaranteed, formulaic amount" rather than a salary, consisting of a fixed percentage of yearly trading profits and losses, payments based on "MD points" tied to his share of management and performance fees net of expenses, a guaranteed aggregate minimum annual total, and a small base draw paid every two months. He claims none of these elements was discretionary. The Wall Street Journal reported in 2023 that DE Shaw had amended its contracts after an SEC investigation into whistleblower impedance clauses, but Michalow's website states the fund still uses such contracts. He further claims rivals such as Citadel and Jane Street do not have comparable arrangements. eFinancialCareers reports that DE Shaw did not respond to multiple requests for comment.