Demystifying derivatives pay: Guest comment

Barbara Larsson and Victoria Macpherson specialise in fixed income, credit and derivatives appointments at search consultancy Stephen Raby Associates. Read on for their take on pay trends in the derivatives market.

A recruitment market works best when the expectations of both groups of participants - potential employers and potential employees - are closely matched. But all the signs indicate that in the first half of 2006 something has gone wrong in the market for derivatives specialists.

The problem appears to have come from a classic mismatch of perceptions. Put crudely, it means that individuals believe they should be offered premiums to make a move - as much as 25%-30%, while top banks think they can get away without them altogether. The result, in far too many cases, has been stalemate.

So why has this happened and how long is it likely to last? To answer this we have to go back to 2005. Not a stellar year by any reckoning, 2005 saw hiring freezes from June onwards and a round of unspectacular bonuses, where only key performers did well.

This led many of the banks to expect a wave of departures by the disaffected and the consequent room and opportunity to pick up new talent. However, where they badly misread the market was in the assumption that they would also be able to pick up this talent relatively cheaply.

Banks believed that fluidity would reduce reward packages, which of course ignored the fact that the best people - the ones, of course, that they actually wanted - would still need a serious financial incentive to leave their comfortable niches.

Too little, too late?

So far, so bad, with the result being banks and many of their potential targets spent the winter and spring eyeing each other across a kind of financial no-man's land. The good news now is that the penny does seem to have finally dropped and in recent weeks we have noticed a growing awareness that realistic premiums will have to be offered.

But as the traditional January to July hiring season enters its final phase, has this come too late for a move in 2006?

Fortunately the answer seems to be no, thanks to a relatively new development in the derivatives world - the three-month notice period. The widespread introduction of the three-month garden leave into the industry over the past twelve months appears to have had an effect on the hiring season, which could transform it into a year-round phenomenon.

And these relatively long notice periods are further fuelling the market as banks attempt to buy back potential movers to avoid at least a three-month wait for their replacements. So while derivatives recruitment may have staled somewhat in early 2006, it looks as if the bottleneck is already opening up.

As the banks play catch up and the market continues to move, the right opportunity at the right package may be just a phone call away.