Published on October 6th, 2016 by Alan L. Sklover
What is the meaning of:
In many areas of business, contracts commonly include what is called a “bonus-malus” provision.
This means that, if future results of an effort, a joint venture, or a sold business exceed a specified performance goal, one side may get an extra payment (that is, a “bonus” payment).
A “bonus-malus” provision would also provide that, if results fell below that same specified performance goal, or another specified performance goal, that same party might have to pay back money previously received from the other (that is, a “malus” payment).
“Bonus-malus” provisions serve to limit both the upside and the downside risks of unexpected events to both sides in a transaction.
Here’s an example. If party A sold a consulting business to party B, their contract might include a “bonus-malus” provision that provides (a) if the revenues in the first year exceed $10 million, then A, the seller, would be entitled to a “bonus” payment of $100,000. But (b) if the first ?year revenues were less than $8 million, then party A, the seller, would have to make a $75,000 “malus” payment to party B, the buyer.
Such “bonus-malus” provisions are starting to find their way into employment agreements and offer letters. Don’t be surprised if you see one in yours, or if such a provision is imposed upon you in coming months and years.
The keys to their negotiation are (a) careful due diligence, (b) reasonable performance goals, (c) accurate means of measurement of future performance, (d) exclusion of the effects of truly unexpected events such as changed laws, wars or natural disasters (earthquakes, etc.) and (e) proven bad faith by either party.
A “malus payment” is different from a “clawback” provision in that a “bonus-malus” provision is usually pre-negotiated into a contract, and does not suggest any misconduct, while a “clawback” provision is usually imposed by law or found in a compensation plan, and is usually imposed without a prior agreement, most often in the context of an allegation of bad conduct.
You read about it here, first.
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