Our Inconvenient Truth


Steve McIntosh suggests an easy solution to what many consider a supply-side crisis in the financial services employment market.

To an extent, the Cayman Islands funds industry has become a victim of its own success. Ask any of the top fund administrators in the Cayman Islands what will be the number one constraining factor on the growth of their business in the next 12 months, and for nine out of 10, the answer won’t be office space, infrastructure, information systems or eroding market share. However they phrase their answer, it will boil down to this: Human Resources. 

The rampant growth of the mutual and hedge funds industry in the last several years has created a dearth in the supply of qualified professionals who helped establish the domicile as a market leader in the first place. With no signs of a positive change in the underlying market conditions, it is no exaggeration to say that the continued success of the Cayman Islands fund administration sector may depend on how well it responds to this crisis. 

At the root of the problem is a growing disparity between the “operating currency” of the local fund administrators and the “operating currency” of the expatriate accountants, lawyers and other financial services professionals upon which the islands’ industry depends. In other words, whilst their customers think in US dollars, a large proportion of a firm’s current and prospective staff does not. 

This is not to ignore the Caymanian and American staff whose earnings and debts are effectively immune to the whims of the foreign currency exchange market. But with close to full employment in the Islands (officially circa 96 percent), it stands to reason that, from an industry perspective, new Caymanian employees can only be found at the point of joining the workforce, not at the stage of professional qualification, the level in greatest demand. Perhaps due to the relative abundance of climate and lifestyle options on offer within their very own borders, and perhaps due somewhat to the endless, reaching arms of the IRS, US professionals have historically tended to stay away from the offshore financial centres in their droves. 

To cope with their phenomenal growth rates, Cayman Islands financial services firms have depended on a steady stream of well-educated, native English-speaking, professionally qualified candidates from the Republic of Ireland and the Commonwealth (principally Australia, Britain, Canada, New Zealand and South Africa). However, a basket of those nations’ currencies has gained around 58 percent in value against the US dollar in the last five years, with industry salaries increasing by less than even the local inflation rate (around 14.3 percent according to the official Consumer Price Index) within the same timeframe. Therefore, even assuming that the Cayman inflation rate has been no greater than in those nations, Cayman salaries would have had to increase by around 58 percent on 2002 levels to have maintained the same level of appeal to such candidates (for example, a salary of AU$137,165 equated to US$70,000 on January 1, 2002 and US$114,028 on April 30, 2007). 

It is initially tempting to apply the argument that, taking into account the lack of income tax, the net salary is still internationally competitive. However, this argument effectively shifts the benefit of a lack of income tax from the employee to the employer. The employer already benefits through a lack of corporation tax (notwithstanding work permit and other significant government fees). In any case, somewhat inexplicably, even highly qualified accountants tend to focus on gross salaries as opposed to net. Even if the reality is that professionals are better off on a net Cayman salary, it may be difficult to convey this adequately to a candidate skimming the gross salaries in the endless job listings of the Financial Times. 

Law firms have, by and large, responded much more effectively to the adverse movements in foreign exchange rates. The salaries of Cayman Islands lawyers have kept pace well with those of their commonwealth counterparts. The reason is clear enough. Accounting principles, standards and techniques are relatively well aligned across the globe. This provides accounting and financial services firms with the fall-back of recruiting qualified accountants from economically impoverished (generally non-English-speaking) countries, where the US dollar is still seen as an attractive denomination in which to be paid. Performing the technical aspects of your role as a fund accountant or auditor does not greatly depend on your ability to communicate fluently in English (although it is certainly helpful in many other aspects of the role). By contrast, legal firms require lawyers familiar with the idiosyncrasies of the English common law principles that underlie the Cayman Islands legal system, who can be found exclusively in other Commonwealth jurisdictions. For the law firms, withdrawing from this critical employment market is simply not a realistic option. 

These are frustrating times for a recruitment agent. When it comes to acknowledging and coping with the economic reality of the global employment market, offshore financial services firms are fairly evenly distributed between the five stages of grief: Denial (If we hold out long enough, we’ll find the staff we need eventually); Anger (Why can’t we find people?); Bargaining (How about an extra five grand? Ten? Fifteen?); Depression (We’ll never find enough people); and finally, Acceptance (Pay them whatever they want). 

The problem for the fund administrators is that current staff are perfectly happy with their salary levels, but would not be happy for long if higher salaries were to be offered to attract new staff with little or no relevant experience. A few firms have experimented with this approach and suffered the  inevitable consequences of low morale and high turnover (of precious experienced staff). Therefore, the decision is not whether to increase salaries to attract new staff, but whether to increase salaries across the board. The total cost of such an increase comes straight from a firm’s bottom line and the absolute numbers of a relatively small proportional increase are evidently unpalatable. 

However, there are ways to manoeuvre around this issue of divisive salary differentials. For example, offering prospective hires a signing bonus is unlikely to anger existing staff, and would also help to overcome a candidate’s inertia caused by the foregoing of accrued bonus at his or her current employer (which tends to become a serious supply constraint in the latter half of the year). Whereas it is politically impossible to lower someone’s salary in future if the adverse currency situation reverses, signing bonuses can be raised and lowered on a case-by-case basis according to current, potentially short-term, market conditions. 

If you accept, as I do, that the international employment market is an efficient one (economically speaking), then you must also accept that the only alternative to competing effectively with other global employers for the best candidates in the world is to settle for competing for the candidates who are not. Of course, such a strategy brings its own frustrations. Management morale will suffer, especially at the middle level, which has to deal on a daily basis with the technical and customer service shortcomings of inexperienced entry level staff. Low morale will increase management turnover, and discriminating generals looking for willing and able replacements should not be surprised to find slim pickings in the trenches. 

For the fund administrators, the choice is stark. Either compromise on your margin, or the quality of your product. A lack of decisive action will inevitably default to the latter. To be sure, recent changes to the Cayman Islands Immigration Law, which have the (entirely intentional) effect of artificially increasing a firm’s turnover, are certainly not helping. A mandated rollover departure potentially trades someone who has come to think he or she is doing fairly well in dollars, for someone who thinks he or she is somewhat underpaid in euros. 

Many financial services firms in the Cayman Islands would do well to acknowledge that not everyone comes to the island for the fine weather. The sad truth is that, in the experience of this recruiter, 99 percent of people care far more about money than they care to admit, even to themselves

Steve McIntosh is a chartered accountant and CEO of CML Offshore Recruitment. He can be contacted at: steve@cmlor.com.

Cayman Funds