When it comes to pay levels, knowledge is power.
Brett Friedman is a senior consultant at Towers Perrin Risk Capital. Contact him at brett.friedman@towersperrin.com. Jeff Hyler is a principal at Towers Perrin Risk Capital. Contact him at jeff.hylar@towersperrin.com.
Ask any group of energy trading managers to name its biggest problem and you will get a surprising answer. Sure, they are worried by bouts of extreme volatility, Amaranth-like P/L destruction, and limit violations. But something unrelated to their trading positions worries them even more— trader compensation and retention.
Although compensation and retention always have been challenges for utilities and other companies not traditionally involved in trading, the advent of hedge funds and other non-energy-based participants has intensified the problem.
Traders are demanding ever-increasing compensation, while a perceived “brain drain” of the best and brightest continues. For many utilities and energy traders, this has led to questions about how to properly pay and retain their traders in the face of market trends.
Trader compensation has been an issue since the early days of power deregulation and the development of trading operations in many utilities. Recruited from natural-gas or petroleum trading rooms at traditional energy companies, traders were accustomed to compensation levels above and beyond what the utilities were willing to offer. Since trading talent at the time was scarce and the desire to develop an unregulated merchant organization was strong, a more generous incentive structure emerged.