Employment derivatives: Difference between revisions

Different types of firm were “long” or “short” this babbling hysteria, which he labelled ''π'', at different points in the hype cycle.  “Π” came from the Greek παράνοια, (''paranoia''), and conveyed the pleasing idea of not just madness but circularity, running on a hamster wheel and so on — all fundamental properties of the employment relationship.   

At its onset, “[[Trad fi|trad-fi]]”, “bricks-and-mortar” firms are [[Short|''short'']], and delusional start-ups, [[Long|''long'']] ''π''. Eventually, the lunacy levels off, reality sets in and employment relations [[Mean reversion|revert to mean]], whereupon the ''π'' curve flattens and then eventually inverts.  

If one could only match off long and short exposures, Barkley realised, firms on either side of the bid could hedge their exposure to π.   

In one of those cruel ironies to whose martial cadence our lives keep time, before he could figure out a way of monetising his idea, Hunter Barkley was laid off and, shortly afterwards, imprisoned for manipulating [[LIBOR]].

{{Drop|A|s she neared}} her [[Schwarzschild radius of alcohol consumption|gin horizon]], HR manager Anita Dochter embarked upon a long and elliptical disquisition to her old pal and erstwhile colleague [[Cass Mälstrom]]. She was agitated about the unstaunchable stream of defections from her firm, a sleepy mid-market broker headquartered in Peterborough.

At the time Wickliffe Hampton was haemorrhaging hundreds of compliance and onboarding staff each month to venture capital-funded dot-com start-ups. Mälstrom herself was an example: not three months earlier she had been enticed from a project stream lead role in the firm’s client money compliance change management programme and was now [[Co-head|Co-deputy CIO]] of legaltech darling [[lexrifyly]].  

[[lexrifyly]] 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 goosing its burn rate by overpaying for bums it didn’t need on seats it didn’t yet have.

“But,” complained Dochter, “we actually ''need'' our people. They actually do productive things for us. You know: [[MIS]] reports. Operational [[deep dive]]s. [[Netting]] audits. But unless we pay ''your'' stupid rates for them, 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 hissed, clambering back up and jabbing [[Cass Mälstrom|Mälstrom]] on the lapel, “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. That does not take actual staff. So stop taking ours.” 

As luck would have it Barkley, fresh out of gaol and making ends meet waiting tables, was their host for the evening. Presenting them with the check and some after-dinner mints, he cleared his throat.

Mälstrom indicated the booklet. “What’s this?”  

“[[NDA]]. Call me.”

{{Drop|S|o was the}} very first “[[employment rate swap]]” conceived. For an initial period of three years, Wickliffe Hampton would pay its entire operations wage bill, controlled for performance, to lexrifyly. In return, lexrifyly would pay its absurd, grossly inflated but as yet unallocated wage budget for an equivalent team — there was no such team, of course: 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>  

 

If this seemed like a bad trade for lexrifyly, in actuality it was not.   

Firstly, it didn’t care: what was money, when it came to it? Secondly, Barkley’s models demonstrated that the economics could change in any number of circumstances: for example, a market crash, hawkish monetary policy, the dissipation of mass hysteria or incipient tech winter. At that point, widescale redundancies and hiring freezes were sure to follow across the sector, while the boring old banking industry would box on as it always had done. 

Ironically, at that point, a startup short ''π'' under an [[Employment rate swap|ERS]] would have a sensible amount of cash coming in from its bank counterparty to keep the lights on.   

{{Drop|I|t was easy}} enough to quantify a bank’s presumptive wage bill since, once it was controlled for hysteria, it was more or less a fixed rate. But what about the ever-changing hypothetical wage bill of a startup? How to gauge that in real-time? And could not a startup not game this very easily, by just pretending its actual preparedness to pay stupid money was lower than it really was?   

The market needed an observable, objective measure of “prevailing startup insanity”, which Barkley denoted “''π”''. He had just the means to achieve it. Under the auspices of the British Human Capital Managers’ Association (BHCMA), he arranged for a committee of fashionable startups to meet each afternoon in a WeWork in Shoreditch and over kombucha martinis to state publicly, in front of a live panel of [[venture capitalist]]<nowiki/>s, how much they would be prepared to pay an underperforming settlements and reconciliations clerk to join them and drive customer engagement. They expressed this as a premium of discount to ''π''', being the equivalent value for the preceding day.

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]] ([[PIEBOR]]). PIEBOR quickly became the ''de facto''  measure of ''π'' and was soon factored into the “floating” leg of [[employment rate swap]]s as standard.

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 that was baked into the portfolio 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.  

By 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.  

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.

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.  

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 layingthe employee off, leaving her holding a twenty-five year out of the money employment rate swap and badly exposed should crypto go tits up.