FRM Part II · FRM Exam Part II · Governance
A bank awards a trader-style credit portfolio manager a target bonus of 1,000,000, with 60% deferred equally over three years, subject to malus. Year-1 payout is the 40% upfront portion plus the first deferral tranche. In year 2, a loss event leads the board to cut all unvested deferred amounts by 50%. Ignoring discounting and returns, what total is ultimately paid across all years?
The total paid is 800,000: 400,000 upfront plus the first deferred tranche of 200,000 in year 1, then the remaining two unvested tranches totaling 400,000 are halved to 200,000 by malus.
- A700,000Correct
- B800,000
- C600,000
- D500,000
Explanation
Upfront is 400,000. Deferred is 600,000 in three tranches of 200,000. Tranche 1 (200,000) is paid in year 1. Before the cut, unvested tranches are 2 x 200,000 = 400,000; a 50% cut leaves 200,000. Total = 400,000 + 200,000 + 200,000 = 800,000. Hence the correct total is 800,000, not 700,000.
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