Employment derivatives: Difference between revisions

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 Under the auspices of the British Human Capital Managers’ Association (BHCMA), a committee of fashionable startups would meet each afternoon in a WeWork in Shoreditch and over kombucha martinis to state publicly, in front of a panel of [[venture capitalist]]s, how much they would be prepared to pay an underperforming settlements and reconciliations clerk to join them to “drive customer engagement”. They expressed this as a premium or discount to ''[[π]]''', being the equivalent value for the preceding day. The venture capitalists would vote by throwing money — literally, from a stack of bills on the table before them — at the “pitching” start-ups.
-The BHCMA would weight the submissions by reference to the volume of cash the venture capitalists lobbed at each startup, trim the top and bottom estimates, average the remainder and compile and publish the trimmed arithmetic mean rate as the [[London Inter-Employer Basic Offered Rate]]. Quickly “[[PIEBOR]],” as it was known, became the ''de facto''  measure of ''[[π]]'' and was soon factored into the “floating” leg of [[employment rate swap]]s as standard.
+The BHCMA would weight the submissions by reference to the volume of cash the venture capitalists lobbed at each startup, trim the top and bottom estimates, average the remainder and compile and publish the trimmed arithmetic mean rate as the [[London Inter-Employer Offered Rate]]. Quickly “[[PIBOR]],” as it became known, became the ''de facto''  measure of ''[[π]]'' and was soon factored into the “floating” leg of [[employment rate swap]]s as standard.
 ==== Credibility spread ====
-{{Drop|P|IEBOR was not}} the only component of an individual swap: short counterparties would also be assigned a weighted average “credibility spread” over (or under) the prevailing [[PIEBOR]] rate. This was a competence assessment made by independent [[human capital]] rating agencies of the median quality of a given counterparty’s staff, routinely marked to market and adjusted by way of a 360° [[performance appraisal|credibility appraisal]] process.
+{{Drop|S|hort counterparties would}} also be assigned a weighted average “[[credibility derivatives|credibility spread]]” over (or under) the prevailing [[PIBOR]] rate. This was a competence assessment made by independent [[human capital]] rating agencies of the median quality of a given counterparty’s staff, routinely marked to market and adjusted by way of a 360° [[performance appraisal|credibility appraisal]] process.
-The credibility rating could yield anomalies. Though HR departments assiduously graded staff against an internal 5-point scoring metric and would [[Force-ranking|force-rank]] staff to a curve, there remained risks that employee “alpha” could be mispriced or too overly concentrated. Furthermore, interdepartmental secondments were beset by credibility rating, diversity arbitrage and [[cheapest to deliver|cheapest-to-deliver]] scandals, especially over quarter end.
+Though HR departments would [[Force-ranking|force-rank]] staff to a curve graded against an internal 5-point scoring metric employee “alpha” could still be mispriced especially over time, as a result of mediocrity drift. Barkley adjusted his model for mediocrity “smile” but the formal grade boundaries and other arbitrary “success criteria” of the HR model still led to arbitrage, especially with the rising popularity of “resource fluidity”. interdepartmental secondments were beset by diversity arbitrage and [[cheapest to deliver|cheapest-to-deliver]] scandals, especially over quarter end.
-Meantime, the need for periodic [[Reduction in force|reductions in force]] was greatly reduced and could be handled quantitatively without reference to individual performance or value — as it was now baked into the portfolio credibility rating. This led to the curious phenomenon of businesses laying off those staff with the ''highest'' credibility ratings first. This was not the last unintended consequence of the financialisaton of employment.
+[[Reduction in force|reductions in force]] could be handled quantitatively by reference to the PIBOR forward curve rather than by business need or individual performance. This was not the last unintended consequence of the financialisation of employment.
 ====Expansion====
-{{Drop|B|y this financial}} engineering Barkley had unwittingly created a tradable instrument out of an abstract benchmark. Due to the offsetting nature of ERS transactions one needed to be neither long nor short actual staff but could trade directionally on abstract [[π]] without having a job, or any workers, at all. These “synthetic” instruments were valuable for sectors affected by the vagaries of the labour market even where not themselves directly exposed to it. Recruitment consultants, employment lawyers, HR Consultants — that kind of thing.
+{{Drop|B|y this financial}} engineering Barkley had unwittingly created a tradable instrument out of an abstract benchmark. Due to their offsetting nature one could trade ERS directionally, on abstract [[π]] without having a job, or even wanting one. These “synthetic” instruments were valuable for sectors exposed to the vagaries of the labour market even where not directly engaged in it: recruitment consultants, employment lawyers, HR consultants — that kind of thing.
 Individual workers began to buy [[π]]-linked [[contracts for difference]] as a way of laying off their own intrinsic [[loyalty discount]], a sort of negative carry that comes from unreflective devotion to a single monolithic corporation. This restricted the need to quit to a narrow run of unmanageable idiosyncrasies such as cultural fit, business relocation and visceral hatred of the boss.
-Before long more exotic ERS payoffs emerged. Capital protected [[Reduction in force|RIF puts]], employment collars, diversity forwards and  synthetic collateralised gender pay gap swaps. All these risks, and more, could be managed in the hypothetical with out adjusting the physical staff roster at all.
+Before long more exotic ERS payoffs emerged. Mediocrity and loyalty swaps, capital-protected [[Reduction in force|RIF puts]], diversity forwards, dynamic flight-risk hedging strategies and synthetic collateralised gender pay gap swaps. All these risks, and more, could be managed in the hypothetical without adjusting the physical staff roster at all.
-Banks even began selling employment derivatives directly to their employees, saving the bother of having to hedge themselves.
+====ERS mis-selling====
+{{Drop|B|anks even began}} selling employment derivatives directly to their employees, saving the bother of having to hedge themselves. There was an inherent conflict here, of course. How could the very person presenting the risk of the organisation be expected to assume it?
-So began the sad chronicle of employment rate swap mis-selling. In this dark episode, banks would separate the employee’s fixed rate, and pay that under a physical employment contract, then separately hedge out their [[π]] risk with a linked derivative. Before the emergence of ERS, the [[π]] risk was intrinsic to the employment contract and could not be abstracted and traded separately.
+So began the sad chronicle of employment rate swap mis-selling. Banks realised they could separate the employee’s fixed rate, and pay that under a physical employment contract, then separately hedge out their [[π]] risk to that worker with a linked derivative. Before the emergence of ERS, the [[π]] risk was intrinsic to the employment contract and could not be abstracted and traded separately.
-The scandal blew up when it emerged HR departments were being offered incentives to place employee counterparties on performance management, arranging with other firms to bid them away or just peremptorily laying them off, leaving staff holding a twenty-five year [[out-of-the-money]] employment rate swaps with no actual job, and badly exposed should [[crypto]] go [[tits up]].
+The scandal blew up when it emerged HR departments were being incentivised to “pi-hack” their derivatives portfolios by arbitrarily placing employees on performance management, covertly arranging other firms to bid them away or just peremptorily laying them off, leaving redu, instaff holding a twenty-five year [[out-of-the-money]] employment rate swaps with no actual job, and badly exposed should [[crypto]] go [[tits up]].
 Such “self-referencing employment derivatives” are now not permitted in many jurisdictions, and attract penalty risk weighing in the UK.