Employment derivatives: Difference between revisions

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 ==== Credibility spread ====
-The LIEBOR rate was not the only component of an individual swap: each employee would also have a credibility spread over or under the prevailing LIEBOR rate. This was a competence assessment made by human capital analysts if the staff. Mispricing this could lead to staff defections, to it was routinely marked to market and adjusted by way of a 360° [[performance appraisal|credibility appraisal]] process.
+{{Drop|L|IEBOR was not}} the only component of an individual swap: each employee would also have a performance-related “credibility spread” over (or under) the prevailing [[LIEBOR]] rate. This was a competence assessment made by [[human capital]] analysts. Mispricing this could lead to staff defections, to it was routinely marked to market and adjusted by way of a 360° [[performance appraisal|credibility appraisal]] process.
-It led to anomalies. HR departments would segment staff according to an internal 5 point scoring metric (a “credibility rating”), and would force rank staff to a curve, lest the banks exposure to employee “alpha” became too concentrated.
+For portfolio transactions (like the first ERS, which was departmental-wide) analysts would assign a  weighted average credibility spread. This could yield occasional anomalies. Though HR departments assiduously segmented staff according to an internal 5 point scoring metric (a “credibility rating”), and would force rank staff to a given curve there remained risks that exposure to employee “alpha” could be mispriced or too overly concentrated.
-Interdepartmental secondments were beset by [[cheapest to deliver]] strategies and diversity arbitrage, particularly over quarter end.
+Interdepartmental secondments were beset by credibility rating and diversity arbitrage and [[cheapest to deliver]] scandals especially over quarter end.
-Meantime while periodic RIFs were greatly reduced they were not avoided entirely, and now could be handled quantitatively without reference to performance or value as it was baked into the credibility rating. This led to the curious counterintuitive phenomenon that the staff with the ''highest'' credibility ratings — ergo the most, well, “pound for pound” expensive — were the first to go. This assisted also in the force ranking process.
+Meantime, while periodic RIFs were greatly reduced they were not eradicated entirely, but now could be handled quantitatively without reference to individual performance or value — as that was baked into one’s credibility rating.
+This led to the curious phenomenon of staff with the ''highest'' credibility ratings — ergo those who were, “pound for pound”, most expensive — being the first to go.  This was of a piece with the theory that firms actively discouraged excellent employees, preferring those to meatheaded to do anything rash like using initiative.
 ====Expansion====
-Barkley also saw the opportunity to trade the instrument as an abstract benchmark, for which you need not be employed at all. So did banks, unfortunately, and so began the employment rate swap mis-selling scandal during which banks would separately hedge out their employee risk and then peremptorily terminate the staff member’s employment, leaving her holding a twenty five year out of the money employment rate swap.{{Sa}}
+Barkley also saw the opportunity to trade the instrument as an abstract benchmark, for which one did not need exposure to the employment market at all.  Thus was made possible by offsetting nature of ERS transactions. You needed to be neither long or short actual staff but could trade directionally on abstract [[π]].
+This led to a proliferation of exotic ERS products, many with me practical utility and unintuitive consequences. So began the sad chronicle of employment rate swap mis-selling. In this dark episode banks would separately hedge out their employee’s π risk, to the employee herself<ref>Self-referencing employment derivatives are now not permitted in many jurisdictions, and attract penalty risk weighing in the UK.</ref>and then peremptorily lay the employee off, leaving her holding a twenty five year out of the money employment rate swap. And badly exposed should crypto go tits up.
+{{Sa}}
 *[[Interest rate swap mis-selling scandal]]
 *[[Credibility derivatives]]
 {{ref}}