The New York "salary rule" will cause chaos for hedge funds

It's day one of the new "salary history rule" on Wall Street. As of today, employers in New York City, can't ask potential recruits how much they were paid in previous roles.  The change is set to cause problems for anyone recruiting for banks, but chaos for anyone recruiting for hedge funds.

At issue is the unpredictability of hedge fund pay. While banks' pay for front office "producers" typically falls within a range according to an individual's level in the banking hierarchy and can therefore be estimated, hedge funds' compensation for salespeople and traders varies widely and is often a percentage of the revenues an individual generates. Under the new rules, recruiters are prohibited from making any form of upfront inquiry that can be used to elicit compensation levels. - They can't ask about pay. And most importantly, when a hedge fund is known to pay percentage deals, they can't ask about revenues either.

In an industry, where revenues are the measure of performance, this is a disaster.

"You can't back into someone's compensation under these rules," says one New York trading headhunter, speaking off the record. "This means that I can't actually ask traders about the revenues they brought in last year, and that if I elicit this accidentally I can't use that information without risking a fine. The whole thing is a nightmare."

Law firm David Polk confirms the conundrum. In a note out today, it points out that the rule prevents recruiters from making any inquiries that might directly lead them to an individual's salary. Infringements are punishable with fines of between $125k and $250k.

As we noted previously, the new rule makes it possible that recruiters will simply make incrementally low salary offers until they hit a level potential hires will accept. However, one recruiter says it could have the opposite effect: "If a bank or hedge fund mentions that it's willing to pay between $450k and $700k and the individual doesn't volunteer his or her previous pay level, the recruiter has an incentive simply to offer the candidate the higher level so as to bring in a bigger fee."

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