Compared to quants, model validation specialists were paid atrociously last year. Might models have been better if this weren't the case?
Buried deep in the Napier Scott salary survey, which we (admittedly) wrote about on Monday, are some interesting figures that illustrate banks' parsimonious instincts when it comes to anything to do with risk.
According to Napier Scott, the average director-level model validator was paid 140k in salary and bonuses last year. That's all well and good - except that the average director-level quant whose models he was validating was paid more than twice as much, at 290k.
Why is model validation pay so poor? It's all down to the fact that model validators work in risk rather than with the traders, says Russell Clarke, director of search firm Mantis Partners.
"Model validation is a utility function reporting into market risk; its whole success depends on it being independent to trading activity. They are further from where the money is made compared to their front office counterparts," explains Clarke.
"Models are developed in the front office and validated in the middle office. However, model validators will typically have the same level of qualifications - an MSc and a PhD - as front office quants," he adds.
Unsurprisingly, model validation isn't seen as the place to be.
"It's very rarely that you'll meet someone who's just done a PhD and actively wants to move into model validation," says Chris Hallinan at NJF Search. "The goal is to attain a front office role, but these tend to go only to the cream of the crop. Model validation thus serves for many as a prospective stepping stone towards a front office position."
Writedowns caused by the huge discrepancies between mark to model and mark to market prices could perhaps have been less had models been more rigorously stress tested by more rigorous model validation professionals.
However, Alistair Milne, a reader in banking and finance (and one-time model validator) at Cass Business School, says writedowns are not the validators' fault: "The temptation for the traders was to choose the model that would give the highest validation and earn them the highest bonus."
Banks do appear to be trying to make amends. Clarke says their recruitment of validators and counterparty risk specialists is up 20% on last year.