Employment derivatives: Difference between revisions
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{{a|myth|{{image|Ironmountain1|jpg|}}}}{{d|Employment derivatives|/ɪmˈplɔɪmənt dɪˈrɪvətɪvz/|n|}} | {{a|myth|{{image|Ironmountain1|jpg|}}}}{{d|Employment derivatives|/ɪmˈplɔɪmənt dɪˈrɪvətɪvz/|n|}}Financial instruments designed to manage the risk of employment variability. First developed in the early part of this millennium by derivatives pioneer and perennial boiler of pots, {{author|Hunter Barkley}}. | ||
====Genesis==== | |||
{{Drop|W|hen midway through}} midway through his customary annual rant about the meaningless of his life as viewed through the lens of his pay packet, it struck Barkley — an amateur [[fi-fi]] novelist, financial services naturalist and tiresome windbag, not in that order — that just as his own fortunes at work were a material, unhedged contingency in his life having little to do with how good he was at it (his work, or life for that matter), so too were everyone else’s. | |||
This included, at far greater scale, his employer. Barkley believed himself, rightly, to be short an ugly [[option]] to the Man. But by the same token a good-sized bank would have an annual ''variance'' in its total wage bill, even before accounting for ''changes'' in in its staff, in the ''billions'' of dollars.<ref>The maths was like so: assume 40,000 people at an average total compensation of about $300,000, with a ratio of discretionary to fixed of between 20% and 50%</ref> | |||
This variance bore little relation to the bank’s own performance, none to its employees, and a lot with ''everyone else’s'' performance. The ''market''. [[Human resources|Human capital management]] trading staff were apt to talk about “benchmarking”, as if there were some indexed rate. | |||
''Perhaps there should be'', reasoned Barkley. It was easy enough to calculate this variance, but ''knowing'' about it was a different thing to ''managing'' it. | |||
Barkley reasoned that different types of firm were “long” or “short” the babbling hysteria drove the employment market. Barkley called the measure of this “madness” characteristic ''π<ref>From the Greek παράνοια, (''paranoia''). It was also pleasing that it conveyed sentiments of going around in a circle, running on a hamster wheel and so on, all of which Barkley recognised to be fundamental properties of the employment relationship.</ref>''. At its onset, “legacy”, “bricks-and-mortar”, “trad-fi” firms were typically short ''π'' and start-ups long. As the lunacy tailed off and employment relations [[Mean reversion|reverted to mean]], the ''π'' curve would invert. If one could only match off a long and a short firm, they each could hedge changes in π. | |||
Instinctively, Barkley knew there was something in this but could not figure out a way of monetising it. In one of the cruel ironies to whose cadence his unremarkable life kept time, Barkley was laid off shortly afterwards and obliged to seek restaurant work as he worked by night on his novels. | |||
==== The first ERS ==== | |||
{{Drop|B|arkley’s fortunes would}} change following a chance encounter in an upscale cocktail bar in West London. As she neared her [[Schwarzschild radius of alcohol consumption|gin horizon]], [[Wickliffe Hampton Asset Management|Wickliffe Hampton]]’s Chief Operating Officer Anita Dochter bellyached to her former trainee, now [[lexrifyly]]’s CEO, [[Cass Mälstrom]]. | |||
At the time, [[Wickliffe Hampton]] — a sleepy mid-market broker — was losing hundreds of compliance and onboarding staff each month to venture capital funded tech firms, while [[lexrifyly]], was just the sort of [[legaltech]] startup darling that was poaching them: it had no product to speak of, no business model, customers or plan but was flush with stupid amounts of cash, a great [[Microsoft PowerPoint|deck]] and an unshakable conviction in the wisdom of goosing its burn-rate by hiring lots of staff. | |||
“But,” complained Dochter, “we actually ''need'' our staff. They actually do productive things for us. But unless we pay ''your'' stupid rates, which we cannot afford to do —” at this point she fell off her stool briefly — “and give them free fruit, unlimited working from home and a soft play area — they won’t stay with us. But, ''you'',” she continued, clambering back on and jabbing [[Cass Mälstrom|Mälstrom]] in the chest, “right now, ''you'' don’t need ''any goddamn'' staff: you just need to show your investors you are clever, imaginative and on point doing fashionably insane things. This does not require actual staff. So stop taking mine.” | |||
As luck would have it, Hunter Barkley was waiting tables that evening and overhead the conversation. He presented them with a pitch book with the check: If you are not actually hiring anyone, why not hedge your employment rate risk of not doing so? | |||
So was the first “[[employment rate swap]]” conceived. | |||
For an initial period of three years, Wickliffe would pay its entire operations wage bill, controlled for performance, to lexrifyly. In return, lexrifyly would pay its absurd, grossly inflated but actually unallocated wage budget for an equivalent sized-team — there was no such team; this was exactly the point — to Wickliffe Hampton.<ref>This was slightly complicated as it was denominated in [[crypto]] and needed to be converted back to Sterling. </ref> | |||
This way, Wickliffe Hampton had the cash required to preemptively bid back restless staff, and lexrifyly could guilelessly piss its investors cash up a wall without troubling the operating resiliency of the banking sector, or needing an HR department. | |||
If this seemed like a bad trade for lexrifyly, (a) it didn’t care: what was money? and (b) ther economics would change markedly should there be a tech winter with widescale redundancies and hiring freezes. And ironically, at that point, it wold have sensible amount of cash coming in from Wickliffe Hampton that it could use to hire some people. | |||
It was easy enough to quantify Wickliffe Hampton’s presumptive wage bill: it was more or less static. But what about lexrifyly’s fantastical aspirations? How to gauge those in real time? And could not lexrifyly game this very easily, by just pretending its wage bill was lower? | |||
====The “LIEBOR” submission process==== | |||
{{Drop|W|hat was needed}}, Barkley reasoned, was an observable, objective measure of startup insanity, ''π''. He had just the means for achieving it. 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 for an kombucha martini and to state publicly, in front of a live panel of venture capitalists, how much they would be prepared to pay an underperforming settlements and reconciliations specialist to join them and drive customer engagement. | |||
The BHCMA would 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]] ([[LIEBOR]]). LIEBOR quickly become the ''de facto'' measure of ''π'' and was soon factored into the “floating” leg of [[employment rate swap]]<nowiki/>s as standard. | |||
The banks could even sell these derivatives directly to employees, saving the banks the bother of having to hedge themselves. By the same token employees could hedge away their intrinsic loyalty discount, and restricting their need to find new jobs to genuine changes in role or idiosyncratic hatred of their bosses. But there was no need to simply “benchmark” themselves periodically any more. | |||
==== 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. | 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. | ||
| Line 28: | Line 45: | ||
Interdepartmental secondments were beset by [[cheapest to deliver]] strategies and diversity arbitrage, particularly over quarter end. | Interdepartmental secondments were beset by [[cheapest to deliver]] strategies and diversity arbitrage, particularly 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, | 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. | ||
====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}} | |||
{{Sa}} | |||
*[[Interest rate swap mis-selling scandal]] | *[[Interest rate swap mis-selling scandal]] | ||
*[[Credibility derivatives]] | *[[Credibility derivatives]] | ||
{{ref}} | |||
Revision as of 16:23, 12 April 2024
|
Employment derivatives
/ɪmˈplɔɪmənt dɪˈrɪvətɪvz/ (n.)
Financial instruments designed to manage the risk of employment variability. First developed in the early part of this millennium by derivatives pioneer and perennial boiler of pots, Hunter Barkley.
Genesis
When midway through midway through his customary annual rant about the meaningless of his life as viewed through the lens of his pay packet, it struck Barkley — an amateur fi-fi novelist, financial services naturalist and tiresome windbag, not in that order — that just as his own fortunes at work were a material, unhedged contingency in his life having little to do with how good he was at it (his work, or life for that matter), so too were everyone else’s.
This included, at far greater scale, his employer. Barkley believed himself, rightly, to be short an ugly option to the Man. But by the same token a good-sized bank would have an annual variance in its total wage bill, even before accounting for changes in in its staff, in the billions of dollars.[1]
This variance bore little relation to the bank’s own performance, none to its employees, and a lot with everyone else’s performance. The market. Human capital management trading staff were apt to talk about “benchmarking”, as if there were some indexed rate.
Perhaps there should be, reasoned Barkley. It was easy enough to calculate this variance, but knowing about it was a different thing to managing it.
Barkley reasoned that different types of firm were “long” or “short” the babbling hysteria drove the employment market. Barkley called the measure of this “madness” characteristic π[2]. At its onset, “legacy”, “bricks-and-mortar”, “trad-fi” firms were typically short π and start-ups long. As the lunacy tailed off and employment relations reverted to mean, the π curve would invert. If one could only match off a long and a short firm, they each could hedge changes in π.
Instinctively, Barkley knew there was something in this but could not figure out a way of monetising it. In one of the cruel ironies to whose cadence his unremarkable life kept time, Barkley was laid off shortly afterwards and obliged to seek restaurant work as he worked by night on his novels.
The first ERS
Barkley’s fortunes would change following a chance encounter in an upscale cocktail bar in West London. As she neared her gin horizon, Wickliffe Hampton’s Chief Operating Officer Anita Dochter bellyached to her former trainee, now lexrifyly’s CEO, Cass Mälstrom.
At the time, Wickliffe Hampton — a sleepy mid-market broker — was losing hundreds of compliance and onboarding staff each month to venture capital funded tech firms, while lexrifyly, was just the sort of legaltech startup darling that was poaching them: it had no product to speak of, no business model, customers or plan but was flush with stupid amounts of cash, a great deck and an unshakable conviction in the wisdom of goosing its burn-rate by hiring lots of staff.
“But,” complained Dochter, “we actually need our staff. They actually do productive things for us. But unless we pay your stupid rates, which we cannot afford to do —” at this point she fell off her stool briefly — “and give them free fruit, unlimited working from home and a soft play area — they won’t stay with us. But, you,” she continued, clambering back on and jabbing Mälstrom in the chest, “right now, you don’t need any goddamn staff: you just need to show your investors you are clever, imaginative and on point doing fashionably insane things. This does not require actual staff. So stop taking mine.”
As luck would have it, Hunter Barkley was waiting tables that evening and overhead the conversation. He presented them with a pitch book with the check: If you are not actually hiring anyone, why not hedge your employment rate risk of not doing so?
So was the first “employment rate swap” conceived.
For an initial period of three years, Wickliffe would pay its entire operations wage bill, controlled for performance, to lexrifyly. In return, lexrifyly would pay its absurd, grossly inflated but actually unallocated wage budget for an equivalent sized-team — there was no such team; this was exactly the point — to Wickliffe Hampton.[3]
This way, Wickliffe Hampton had the cash required to preemptively bid back restless staff, and lexrifyly could guilelessly piss its investors cash up a wall without troubling the operating resiliency of the banking sector, or needing an HR department.
If this seemed like a bad trade for lexrifyly, (a) it didn’t care: what was money? and (b) ther economics would change markedly should there be a tech winter with widescale redundancies and hiring freezes. And ironically, at that point, it wold have sensible amount of cash coming in from Wickliffe Hampton that it could use to hire some people.
It was easy enough to quantify Wickliffe Hampton’s presumptive wage bill: it was more or less static. But what about lexrifyly’s fantastical aspirations? How to gauge those in real time? And could not lexrifyly game this very easily, by just pretending its wage bill was lower?
The “LIEBOR” submission process
What was needed, Barkley reasoned, was an observable, objective measure of startup insanity, π. He had just the means for achieving it. 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 for an kombucha martini and to state publicly, in front of a live panel of venture capitalists, how much they would be prepared to pay an underperforming settlements and reconciliations specialist to join them and drive customer engagement.
The BHCMA would 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 (LIEBOR). LIEBOR quickly become the de facto measure of π and was soon factored into the “floating” leg of employment rate swaps as standard.
The banks could even sell these derivatives directly to employees, saving the banks the bother of having to hedge themselves. By the same token employees could hedge away their intrinsic loyalty discount, and restricting their need to find new jobs to genuine changes in role or idiosyncratic hatred of their bosses. But there was no need to simply “benchmark” themselves periodically any more.
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° 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.
Interdepartmental secondments were beset by cheapest to deliver strategies and diversity arbitrage, particularly 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.
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.==See also==
References
- ↑ The maths was like so: assume 40,000 people at an average total compensation of about $300,000, with a ratio of discretionary to fixed of between 20% and 50%
- ↑ From the Greek παράνοια, (paranoia). It was also pleasing that it conveyed sentiments of going around in a circle, running on a hamster wheel and so on, all of which Barkley recognised to be fundamental properties of the employment relationship.
- ↑ This was slightly complicated as it was denominated in crypto and needed to be converted back to Sterling.