Employment derivatives: Difference between revisions

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 {{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]] ([[LIEBOR|PIEBOR]]). PIEBOR quickly became 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 restrict 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 ====
-{{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 could lead to staff defections, so 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: short counterparties would also be assigned a weighted average “credibility spread” over (or under) the prevailing [[LIEBOR]] 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.
-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.
+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.
-Interdepartmental secondments were beset by credibility rating and diversity arbitrage and [[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 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.
+====Expansion====
-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.
+The banks could even sell employment derivatives directly to employees, saving the bother of having to hedge themselves. By the same token, employees could hedge away their intrinsic loyalty discount, and restrict 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.
-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 too meatheaded to do anything rash like using initiative.
-====Expansion====
 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.  This was made possible by the offsetting nature of ERS transactions. You needed to be neither long nor short actual staff but could trade directionally on abstract [[π]].
-This led to a proliferation of exotic ERS products, many with no 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.
+This led to a proliferation of exotic ERS products, many with no practical utility. 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}}