Friday, February 6, 2009

"Bonuses" and "Maluses"

One of the problems with bonuses is that they create asymmetric payoffs - there's typically an upside for some actions, but no downside (yes, I know, there's the settling up in the labor market, etc., but that's a story for another piece). To deal with this, at least one firm (UBS) has started using "maluses" along with bonuses
"Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders."
This concept is aslo called a "clawback", and embedding it in compensation packages so that a person has a downside component is a great idea. Looks like something we'll end up discussing in class.

HT: Proxyland, ("corporate governance and other oxymorons"), a blog worth reading.