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Wednesday, 6 March 2013

In praise of the malus

Bonus as any fule kno' comes from the Latin:
Etymology: From Old Latin duonus.
Adjective: bonus m (f bona, n bonum); first/second declension
1.good, honest, brave, noble, kind, pleasant, 2.right, 3.useful, 4.valid, 5.healthy

It's opposite would be a malus.  I have long been a fan of the malus, because that would allow for the clawback of previous bonuses when the business goes pear shaped.

Until now the idea hasn't really caught on, mostly because turkeys will never vote for Christmas, but now I think it is an idea whose time has come. Not perhaps in the form that it was originally intended, but in the wonderful world of finance, old ideas have a habit of coming back in new guises, and this particular structure seems to be a slightly contrary way of getting banks and their employees around the restrictions that the EU are trying to impose.

Let us suppose that nobody in their wildest dreams would ever expect to get a bonus to make their total pay equal to 10 times base salary.  So we set that figure as the annual pay for bank staff.  They don't actutally get paid 1/12 of their annual salary every month, but only 1/120, with the final 109/120 due in the final month.  Also payable in the final month, or rather repayable, is the "malus", which is a sum recognising the diffference between actual performance and the performance required to justify the full salary. Management sets the malus for every employee up to 108/120 of the annual salary, and offsets the amount of the malus against the alary payment for the year.

Net result: 0% bonus, and even if the malus was taken into account, the amount of the malus is always loess than the amount of the base salary.

1 comment:

gwb said...

My current remuneration scheme shares a common feature with your malus model in that actual take home pay is less than contracted base pay for 11 months of the year (and for the whole year when bonuses are low). We have a contracted base pay of 100 with no bonus and each year we "volunteer" to take 50 as monthly pay plus the opportunity to earn another 100 as bonus.

This is where it gets interesting. For applicants who have variable earnings mortgage lenders typically only lend on a multiple of base pay. No doubt this protects them and their customers against the risk of over extending themselves. Being in receipt of variable pay we are subject to the same rule, despite the fact that our pay can vary below base thus negating the protection. Effectively it means some employees choose to borrow larger amounts against non-guaranteed bonuses.

Should the malus scheme be adopted and mortgage lenders were to continue with the same approach then the value of mortgages available to city types would balloon. Followed shortly by London house prices. What fun.