Malus Clauses in Executive Compensation

Abstract

Economic factors and financial challenges are causing a paradigm shift in how large organizations design their employee incentive schemes. Companies have started looking at adopting the idea of "Bonus Malus" or "Malus" to better align employee incentives with long term performance and ensure effective use of incentive spend. Remunerate can help.

The Malus Concept

The concept of Malus for performance-related compensation has been around for a long time. However, it has really only been since the Swiss bank USB, adopted the concept for its Executive Incentive pay structure, that the Malus clause has gotten the momentum and attention it deserves.

For Executive Incentive payments, Malus, (the return of performance related compensation as a result of the discovery of poor performance) works in such a way that the Malus clause of a contract is reviewed months or even years after the Incentive payment has been made, eg, when the real performance results for the employee's strategic goals can be determined.

Given the current economic upheaval it is likely that Malus clauses will start appearing in many executive contracts as they are renewed. For example, UBS has already released details of its new executive remuneration scheme which includes Malus conditions in relation to both short term cash bonuses and Long Term Incentive (LTI) share plans. In general, this idea should be applauded, as it firmly links employee performance to rewarding the long term, sustained performance of the company. This removes the reward for behaviours that have short term returns, but reduce the company's long term opportunities.

Generally incentive systems base short and long term incentives on the base salary of the employees. The concept of the Malus might also be based on the base salary, but it will be more useful if based on the incentive itself, given that many Executives' incentive payments are the many-fold of their base salaries.

There are plenty of possibilities for Malus clauses, payment types effected, and review timeframes and scenarios.

Linking Malus to complex remuneration schemes

This is where Remunerate can help.

Remunerate, is an Employee Review software that can be readily configured to support any Malus clause. Its flexible design allows the configuration of multiple review steps, that permit users to define the percentage of the Incentive Pay to be paid out during this review, future reviews, or even any amounts to be returned to the company (typically in the form of reduced incentive payment). Incentive Pay Reviews can be designed to have a multi-year structure and thus be linked to real performance outcomes.

Remunerate's Budget and Spend calculations as well as its flexible reporting tools can also support the management of Malus compensation.

Remunerate will manage the complexities associated with adopting and implementing a Malus approach for executive payments. Contact us to find out more.

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