Career Advice for a New Era

The Gold Rush may be over, but job hunting isn't the wasteland of two years ago.

By John Thackray

The job market for derivatives professionals suffers from a bad case of Paradise Lost. For many people it's hard not to view the five-year hiring boom that peaked in 1993 as a Golden Age. Back then everybody's comp was ratcheting up because bosses feared mass defections, and it took a 60 percent compensation increase to effect a hire-away.

Forget the backward look and get attuned to the present reality: This is a "steady-state and mature job market" according to Steven Newman at recruiter Smith Hanley. "Mature" sounds pretty innocuous at first, but this little word represents a dramatically different job climate-one that is likely to exist at least for the rest of 1996 and probably longer.

Last year the job market for derivatives pros got up off the floor onto which it had fallen during the job slump of 1994. But the sense of recovery has not been ubiquitous, and some hires and candidates have yet to get over that "wasteland" feeling. Overall, however, there has been a small resurgence in the number of new positions created, according to the majority of executive recruiters and sources on dealer desks.

Small Pool

By Wall Street standards the flesh market in derivatives pros is actually quite small. A few hiring initiatives, or the lack of them, can have macro effects on the perception of the market and on compensation trends. "There is not an endless supply of derivatives people who are really outstanding," says one prominent recruiter. "One big consumer who comes in and does heavy recruiting can churn the market because of the limited supply."

Last year, however, there clearly was no such behemoth recruiter on the scene. Instead there were lots of small-scale moves by many players that added up to a mild recovery. Most of the decline in demand resulted from larger employers working off excess capacity. There were signs last year of headcount contractions at both Bankers Trust and Salomon Brothers, the latter of which reportedly eliminated a sales force specializing in regional banks. Merrill Lynch was roiled with defections following a great year in which revenues were not matched by commensurate bonuses, according to one recruiter. "Many of these top-bracket houses let go some really good people," notes the head of trading at a major firm. "It was not a matter of cutting off deadwood." Still to come this summer: the shakeout of derivatives staffs following the Chemical/Chase merger.

Recruiters are quick to note that not all the many hirings and firings at dealer desks are market indicators. Periodic purges are characteristic of the Street. Then, too, there is the constant ebb and flow of tactical advances and retreats, with their attendant taking on and sloughing off of talent, and the games of musical chairs attributable to political changes in firm power structures. Taking all this into account, recruiters say that the total number of jobs at major dealer desks was not down that much by year-end 1995.

Big Names

The strongest force for new job creation came from the foreign banks (the Japanese excepted) seeking beefed-up derivatives competence. UBS, NatWest, SocGen, ABN Amro and ING all made some very high-profile hires. Others cited by recruiters are Dresdner, Commerzbank and Santander. "Some of the foreign banks have started to get back into, or get deeper into, the derivatives market-for some banks, that means the need to attract high-caliber pros capable of providing a sophisticated product knowledge," notes Lamalie Amrop's Bill Cicchino. Another source of recruiting came from second-tier U.S. firms like Paine Webber, DLJ and Bear Stearns and from regional banks staffing up derivatives operations for their own clients.

Believe it or not, some not insignificant financial institutions that have sat on the sidelines are now changing strategies. Smith Hanley, for example, has an assignment from one big bank that is currently building a de novo derivatives team, and for a start is looking for a head trader, risk manager and marketing boss. "Although one can only go with anecdotal evidence, I get the sense that we're seeing more institutions bringing up the idea of taking aboard a team of derivatives people and getting involved again," says Michael Brenner of Lamalie Amrop. "I've seen more of that in the last two months than in a very long time."

Getting Picky

If labor market maturity is a drag from the individual's point of view, it is quite the opposite from management's perspective. Bosses love the power it gives them to control compensation outlays, which were really out of control during the boom when the surplus of talent was zero. When there is what recruiters call a "float" in the market, bosses' bargaining strength increases. Market maturation allows employers to withhold a larger share from the earnings pool, thus lowering the cost of retaining staff.

During the Gold Rush many employers grabbed people impulsively. Nowadays they are more rational, deliberate and cautious and more likely to hire according to a plan. "Companies now understand how to run their derivatives businesses much better than they did," says Smith Hanley's Newman. "They have the internal resources to address any new market trends that emerge in an orderly way. Their business, and their staff needs, are more predictable and manageable." Says George R. Wilbanks, managing director of recruiter Russell Reynolds Associates, "When you get away from the frenzied period, there is more discipline in the approach to hiring, and therefore searches take longer."

Caution is ubiquitous, even in a promising area like credit derivatives. Observers note that there has not been a lot of hiring. Companies are building up internal capabilities with people already on payroll, to be ready for the deal flow. Only when there is a dramatic upkick in revenues are they likely to scour the job market for specialists.

The story is much the same in risk management control: some promise of job creation but no hiring stampede. The risk management control flesh market displays another characteristic of the current scene, namely, that employers are fishing for the best out there. Searches are designed with broad compensation bands, says one recruiter. "In the rising market for risk managers the salary range is quite wide, depending on what kind of person the firm is trying to attract to the position. Is it a guy with the background of a policeman, or someone who can manage the business so that trades get done?"

The difficulties of defining what you're worth fall heaviest on middle-of-the road talent, because opportunities are scarce. "It is increasingly a situation where there is demand only for skilled people with a substantial amount of experience," notes the desk head at a money center bank. "Resumes are continuing to come in here. People are always looking. But only people who are highly skilled are going to find a new home." Recruiter David Morgan of Morgan Stampfl recently gave this advice to the head derivatives trader at a big foreign bank: "Sit tight. If something good comes along, great. But there will not be a lot of opportunities coming across your desk."

From a morale point of view, employers are under a lot of pressure to make do with the people they've got, hence the prevalence of internal lateral moves. According to Jacqueline Bernstein of Peak Search, there is now a tendency for more lateral moves within firms. "Horizontal growth within firms-for example, sending people to London-eliminates the need for outside hires. A lot of derivatives books are run from London now, and virtually all of equity derivatives is working out of London. If you're willing to relocate to Europe or the Far East you're safe."

New Balance

The new balance of power in derivatives shops shows up in other ways. Bosses are more likely to play hardball when it comes to sign-on bonuses and guarantees. "I've seen situations where the candidate believes he's entitled to a two-year guarantee, but the employer offers only one year," says one recruiter. "If the candidate won't budge, the hirer says, 'Thanks, we'll keep looking.'"

Another way some employers play the steady-state market is to use more non-cash compensation. "The more equity to a compensation program, the greater the teamwork," says Russell Reynolds' Wilbanks. "And it increases the employer's ability to retain good people." In an even worse practice, from the employee's viewpoint, "People have been awarded promotions and better titles in lieu of bonuses and raises," notes Peak Search's Bernstein. "I've been in contact with people who were made AVPs rather than given a raise and they were not very happy about it."

As to real pay, Alan D. Hilliker of Egon Zehnder reports that compensation structures nowadays are more likely to follow the "barbell" shape. The barbell is used by labor economists to describe the elimination of middle-rank positions and the concentration of employees at both extremes of the pay scale. "The people who are good are well-rewarded, some getting as much or more than they've ever received," Hilliker believes. "But the disparity in pay between the top performers and the average ones has never been greater."

As always in a buyers' market, rainmakers are in high demand. "In 1995 the emphasis was on marketing people who could come in with books of business," says Smith Hanley's Newman. "You had a number of firms upgrading sales staff with people who could add trades to their books immediately."

How long will this mature market last? There are those derivatives pros who feel the wreckage of 1994 is but a distant memory and foretell a future paved with gold. According to some reports, first quarter profits in several firms were spectacular. Another sign of returning boom times, according to one recruiter, is the Arrogance Meter. "A lot of the ego that was so prominent among these people two years ago went away," he recalls. "Their behavior was very different when they had the stuffing knocked out of them. Now the arrogance is back."

How Much Are You Worth?

Okay, class, Economics 101 says that all value is exchange value. So nobody in any job market knows what they're worth until they actually go out and get a bid. When hiring is brisk, the grapevine carries enough information for everyone to measure what they can gain by a switch of employers. But "guestimates" are a lot harder in a mature market. Here is one prominent recruiter's take on the compensation pyramid at a major bank.

• Head of trading or marketing = $1 million plus
• Head of a desk or book = $600,000­1 million
• Senior traders = $300,000­500,000
• Junior-to-intermediate traders = $150,000­250,000

Quants seem to be in pretty good demand. The same recruiter currently has a search for a head of research with total compensation in the $400,000-500,000 range. A senior derivatives analyst, say with five years' experience, could fetch between $250,000 and $300,000.

Some other characteristics of the current job market:

• Sign-on bonuses are pretty scarce
• A compensation guarantee covering two years is as rare as the dodo bird. One year is often hard enough to get.
• Expect pay negotiations to take longer than in the past. Employers have a morbid dread of over-paying. These days more of total comp is tied to revenue-generation, with the old practice of paying a direct percent of volume making a return in some shops. Says a trader at Chase Manhattan: "Banks are scrutinizing people more carefully for their ability to produce revenues. They are making the distinction, 'Was he profitable in his last job, and was that because of the guy or the seat?'"
• Don't expect that you can piggyback on a firm that is growing and profitable. "Compensation overall for 1995 was only marginally better than 1994, despite the fact that profits were much better," reports Russell Reynolds' Wilbanks.
• The unemployed are finding it harder to get back into the game than in the past. A beached derivatives professional who doesn't find a position within six to eight months should think of selling mutual funds.

Uncle Sam Could Set Your Bonus

When Douglas Harris, senior deputy comptroller for capital markets at the Office of the Comptroller of the Currency (OCC), suggested in a speech last November that banks should pay traders on a risk-adjusted basis, howls went up in the canyons of Wall Street. The New York Times ran about 20 inches in a reaction story, richly quoting Street executives' derisive views of government intervention into their compensation policies.

Five months after the brouhaha the quixotic Harris shows no signs of taking back his words. Harris still believes his government department has every right to stick its nose in firms' compensation policies that might encourage traders to take on higher risks. In an interview last month Harris said that regulators continue to be concerned that some firms operate "compensation policies that create incentives to risk." He added that earlier this year the OCC issued guidelines on derivatives, which give "useful advice as to how they ought to be looking at this issue." In essence these guidelines encourage banks to assess the riskiness of every trade and pay bonuses accordingly. The riskier the position, the less the bonus-it's that simple.

The calculation would not be difficult as banks already know the risk-adjusted return of any trade, Harris says. If one trader earned more profit for the bank than a colleague but also incurred more risk, their profits should be assessed on the basis of a common denominator between the two traders. Harris believes that many of the big firms are already performing versions of this assessment; he just wants to make sure the practice is ubiquitous.

Harris advocates a deeper tie between a trader's welfare and that of the trader's employer, which is why he approves of bonuses partially paid with stock or stock options. He hopes the practice will discourage dealers from putting on positions that might jeopardize deferred future earnings.

It might seem that one unhappy and vocal regulator isn't going to make much of a dent in the Street's traditional pay practices. But recent history shows that what regulators want they usually get.