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| Employment derivatives
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| /ɪmˈplɔɪmənt dɪˈrɪvətɪvz/ (n.)
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| A financial asset class developed in the early part of this millennium by derivatives pioneer and perennial boiler of pots, Hunter Barkley.
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| When midway through his customary annual rant about the meaningless of his life and meagreness of his pay packet, it struck Barkley — an amateur fi-fi novelist and financial services naturalist — that just as the variable cost of his own employment was a material, and largely unhedged, contingency — Barkley considered himself permanently short a very ugly option — so too was everyone else in modern finance and therefore, the other side of that trade, but on a greatly levered magnitude, were banks.
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| A good-sized investment bank, he reasoned, would have an annual variance in employee compensation, without accounting for any changes in employment, of at least $2bn.
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| Banks should see that compensation variance, over and above its fixed costs, as being akin to interest. Just as an institution with predictable revenues was “exposed” to the interest rate environment — and the interest rate environment, determined by LIBOR, was in a very real sense an uncontrollable third-party beast — so it was exposed to the febrile market for employees. If, say, rapacious private equity funds or delusional cryptobros were paying stupid money for operations staff, you had little choice but to match them for your operations staff in the annual compensation round. It didn’t really matter how much money you were making, or how good a job they were doing. It was just that the employment cost went up.
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| They would be like interest rate swaps. A bunch of large employers would submit, daily, how much they would be prepared to pay to hire established categories of worker, to derive some kind of London Inter-Employer Bid-Offer Rate (can we call this LIEBOR?). Then the British Human Capital Managers Association would compile and publish a list of rates. Employer could swap out their fixed costs for a floating rate, thereby hedging employment costs. Employees could do the same, hedging against their intrinsic loyalty discount, and restricting employee moves to genuine changes in role, or idiosyncratic hatred of boss, rather than just the need to re-benchmark periodically.
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