Compensation Trends in Quantitative Risk
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Compensation Trends in Quantitative Risk
31 Aug 2016

Compensation Trends in Quantitative Risk

Overpaying for Junior PhDs

As recruiters within the Risk Analytics space, we come across PhD candidates wanting to take the next step in their career on a daily basis. On the other side of the spectrum, our clients are increasingly demanding for junior to mid-level candidates to have PhDs (2-5 years of experience) across all areas of quantitative risk.

Because this space is becoming competitive, retaining strong candidates is increasingly difficult given the plethora of risk opportunities available, some firms are dishing out eye-popping base salaries, whether to a junior PhD moving into a new role or paying them a large amount right off the bat. The idea behind this tactic is that by giving them such a large base salary, it will likely price the candidate out of other opportunities for the next 2 – 3 years if they decide to look externally – and many of them will get to the offer stage if they do. For many firms that employ this technique, it’s working.

Why PhD candidates are so highly sought after                          

There’s no doubt that pursuing and receiving a PhD requires a strong passion for your field of choice. It also says that you are willing to put in an extensive amount of hard work. Many dissertations require students to dive much deeper into mathematical/statistical theories than someone who only has a Master’s, and work with those theories for a longer period of time as a PhD can take up to 5 years to complete.

While on a meeting with a renowned name in the Risk Modeling industry, we recently inquired as to why PhDs are special. His response was that PhDs have a much easier time looking at models and formulating their own opinions on the models in a well-thought out manner, which is something very important within model validation – the space that has seen the largest growth in recent years.

He explained that “Masters” validators had a higher tendency to regurgitate what the developers say – which leads to the second line of defense in the modeling process being trivialized. Models that have their assumptions and design severely challenged that still end up getting approved are likely to be very useful models. Models that are not thoroughly critiqued have a much higher rate of model failure and end up having to be redeveloped or put in the archives of the model inventory never to be used again.

Geographical Trends                                                                                              

There is no doubt that the financial hub of the US, arguably the world as well, is New York City.  We talk to countless candidates everyday that say their main reason for looking is that they want to get to New York, especially the more junior candidates. They likely took an opportunity that would allow for them to gain the 1 – 2 years of experience necessary to be considered a valuable Risk candidate and then want to take those skills to New York – this is common across both Masters and PhD candidates.

For this reason, overpaying for fresh PhDs is most common amongst regional banks in the South that lose junior PhD candidates all the time for opportunities in New York. Satellite offices of major banks in the South are much less guilty of this. If PhD Candidate X has one year of experience and is getting paid a $125k base in a Southern state where the cost of living difference can be up to 40% cheaper than NYC, and they go to apply to an NYC position they will likely expect a cost of living increase to be accounted for in their new compensation figures and therefore will price themselves out of the opportunity. This candidate might expect a $145k to $150k base salary in New York – something that will enable them to maintain a similar standard of living however is a range justifiable for candidates with more years of experience.

Note: This is not only common to the South, as we have seen this tactic also employed on the West Coast and Mid-Atlantic region in cities such as Charlotte and Washington DC.

For a VP Model Validation role in New York (5 – 7 years of experience expected minimum), a competitive compensation range starts at $150k (and generally will go up to $180k). It is extremely hard for compensation teams and HRs to justify giving Candidate X with one year of experience a VP title as well as a $150k base when the requirements for the role are much higher and there are other candidates out that with many more years of relevant experience.  At the same time, an Associate level role in NYC seeking candidates with 1 – 3 years of experience, will probably max out at $120k (and that’s if they are generous) – which would mean a lateral or potential cut for a PhD Candidate. AVP level roles will go up to about $135k – which does not provide much room for a salary increase to give someone such as Candidate X an incentive to move. We have sent candidates based in the South with similar profiles to clients in the Northeast and gotten feedback along the lines of, “We love this person’s profile but we can’t put them through an interview process as they are being paid too much for their years of experience.”

Our advice to clients who are eager to hire junior PhDs with relevant experience, either be willing to pay, be willing to consider Master’s candidates from strong programs, or be willing to spend time on a search in order to find a candidate in the right situation.

What is your PhD in? How is this viewed by the market?

  • PhDs in Theoretical Physics tend to be considered the most brilliant and end up being the most successful.
  • PhDs in Statistics generally tend to interview well as many technical questions in interview for risk modeling jobs are focused around statistical techniques and methods. We have seen these candidates slip up on simple statistical questions in interviews – nothing is a given
  • PhDs in Econometrics follow closely after that but it depends on how statistic-focused their coursework and thesis was.
  • PhDs in Mathematics or Applied Mathematics come after
  • PhDs in Economics generally do not add a great deal of value since many times they are focused on theory and financial markets from a more qualitative standpoint – however there can easily be exceptions

Desired Skills in the Current Market

Wholesale Credit Risk Model Development and Validation – This has been a major area of growth for small banks, medium sized banks, and the largest investment banks in the world. Credit Risk Model Developers and Model Validators that have wholesale PD/LGD experience focused on C&I portfolios and CRE portfolios are likely to find open positions hitting all levels from Associate to Director.  C&I portfolios can be particularly complex so candidates with strong risk modeling skills that can also understand the business aspect of these portfolios will have a significant edge over their competition.

Front Office Operational Risk – There has been a trend within Operational Risk to expand its scope from being a back office function to a firm-wide staple. A specific area of expansion has been into the front office. Candidates that can develop, implement, and execute a full RCSA framework across Sales & Trading desks are highly coveted. Ops Risk candidates that have experience covering Investment Banking functions such as M&A, debt & equity capital markets are also in desire, but not nearly as much as S&T considering that split second decisions or errors can have an immediate negative impact resulting in immense losses for banks.

VaR, IRC, CCAR – Investment banks hiring within market risk have had a common type of profile they are looking for, mainly across the AVP/VP level. This being VaR Modelers that have both IRC (Incremental Risk Charge) and CCAR experience. This type of modeling is prevalent across all investment banks, both US and European.

Model Risk Audit – This is a third line of defense in the modeling process, and is relatively new. These roles fall within the audit space because they follow an audit process, however the work required for these types of roles are generally fairly quantitative, as they require independent testing of model development and model validation processes. Candidates with model development or validation experience can generally do this type of a role. Hiring within this space has spanned from the Associate to Director level as many banks are looking to build out these teams to bolster their model risk processes. Some firms have teams that specialize in auditing certain kinds of models (market vs. credit) and some firms have model audit teams that are more generalist and oversee all kinds of risk models. If a candidate who has credit risk modeling experience would like to gain market risk experience, I would recommend that they look into some of these kinds of roles as they can likely be qualified for the role while still having the opportunity to gain exposure in models they have not worked with before.

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