Thread by @KrisAbdelmessih

I remember haggling over some trinket in Khan el-Khalili 16 years ago.

The seller opened at equiv of $50. I negotiated down to $2 and still felt ripped off.

I remember telling the guy off

"You would have let me pay $50 for something you were willing to sell at $2"

It didn't bother me that much (negotiating in my bad Arabic felt like a fun game) but I realized how much I internalized the concept of open outcry and if your bid/offer was inferior to one that was shouted it was technically illegal. Made me appreciate how our markets work.

The reason I remembered the story was a convo I was having at lunch with a friend yesterday. We were discussing compensation. Employers and employees navigate semi-transparent labor markets.

We were discussing a particular strategy.

Some employers will attempt to pay you the minimum or underpay you in the sense that they will always silently be challenging you to solicit other bids.

The strategy is to counter generously if you actually find one. This would tend to work esp well...

if the employer is away from the talent hub. For example, a HF based in AZ would be away from major talent hubs. Any employees with families and roots in AZ would be trapped by high switching costs. Even those without roots who were lured into jobs by a good upfront pay might...

end up trapped as they settled in AZ.

So you end up in these dynamics where the most aggressive employees (or those most confident in their worth) shop themselves and are then tempted with counteroffers by their current employer.

What do you do? On the one hand if I was them I'd feel the way I did in the Egyptian bazaar. "You made me work just to get a fair price". Accepting a counter offer might even feel like staying with a partner who cheated on you. You can stay but now you don't trust them.

All that said I have seen cases where the employee accepts the counteroffer, gets their pay readjusted much higher and everyone is "happily ever after", validating the employers strategy in the first place and making comp a source of edge.

Anyone that has ever worked in derivs or at a mm knows what a beast comp negation can be. There's a trader on both sides of the table.

Both sides are pricing calls and puts, netting risks, and trying to find structures that work for both sides risk preferences.

Labor markets are not open outcry. There's high switching costs and some opacity. The asymmetry and nature of people who rise to the top of firms means you can be pretty sure the firms explicitly think of how much edge they are making off the employees.

One example of this is employees that are on discretionary bonuses.

If you are at a fund and knock it out of the park your delta to the windfall decays pretty quickly. Why?

Because your employer's bid for your service is pegged to your replacement cost. So if you are at a fund, they might peg your pay to your counterpart in banking who doesn't have anything like the upside that you would theoretically have at a fund.

Only the GP owns any unbounded call option.

Would a GP ever let you make life-changing money? It's not in their best interest.

So regardless of your p/l, their calculus always comes back to what is the best bid for this person weighted by their odds of finding it.

I've seen generous firms in the long/short space circa hedge fund hey days in the 2000s pay PMs (non-partners) numbers north of $20mm in a year.

I always thought how crazy that was. You'll never see a derivs shop "overpay" for a seat in the same way.

I'm probably missing something, but I've had many convos with people on the trading/derivs side and the feeling is employers are very much obsessed with what is fair value of an employee and why would you think they aren't trying to maximize off you? That's their whole biz.

Anyway, sometimes when I look over the fence at the (seeming) abundance in tech I wonder how they think about pay?

In trading the market dares you to start your own thing bc there's no path to partner. Employers know how many skills you need to bring together to actually launch

So they are highly protective of economics once they succeed. It makes sense, but again it's the same dare...you always need to be testing your worth. Nobody is going to pay you what you think you are worth.

It's neat to see Twitter as another tool for people shopping themselves and improving the transparency (at least in DMs) and liquidity of the labor market.

Anyway, just some stream of consciousness on the back of getting ripped off for $2 in 2005

Happy hunting