America Has Gone Mad! (The AIG Bonus Payments Should Be Defended!)

Mar 23 2009

America Has Gone Mad! (The AIG Bonus Payments Should Be Defended!)

Published by Steve Latter at 12:41 am under

The $165 M in AIG bonuses that we have heard so much about this past week should have, in my opinion, been paid and then defended by Congress and the President!

As a former CFO, I can say with certainty that I have never paid an employee a bonus for poor performance. To underscore this point, I am 100% against any publicly-traded company ever making any bonus payment to an employee for poor performance regardless of the circumstances. The recently paid AIG bonuses are not an exception to my strong conviction. The true facts surrounding the $165 M in AIG bonus payments have not been made clear to the American public. Moreover, our cowardly American leadership (President, Treasury Secretary, Congress, AIG CEO) refuse to do what is right and defend the bonuses because, in my opinion, of their fear of public opinion.

The $165M in recently paid AIG bonuses, funded with a portion of approximately $170B in taxpayer “bailout” funding, are not PERFORMANCE bonuses being paid to the same AIG executives that got us into this financial mess in the first place. That is what most of America mistakenly believes. In fact, the senior executives, including the CEO, whose decisions caused the company’s collapse, are long gone. Moreover, the top 7 officials currently at AIG have agreed to forego all bonuses. The recent bonus payment outrage also excludes the next 43 highest ranking AIG leaders whose bonus payments are appropriately being linked to restructuring the company and paying back the taxpayers the $170B that has been already sent to bail them out.

So what exactly are these bonus payments for that all of America has gone mad over? The $165 Million in recent bonuses paid to AIG employees were RETENTION or STAY bonuses and not performance bonuses. AIG employees assigned to unravel the mess were offered retention bonuses to stay and work out the problems of AIG’s Financial Products division which has already been announced to be shut down. These retention bonuses were paid to incent remaining and new workers to stay until the billions of dollars of derivatives, still at risk, were unwound. Using basic common sense, which is why retention bonuses have been paid for decades, no reasonable, talented worker would agree to work in a discontinued division receiving hate mail and death threats without receiving a retention bonus. A retention bonus helps keeps top employees working on problems of a division being shut down rather than them resigning and moving on to another company.

As Congress tries to recover these just recently paid bonuses, either through the AIG employees paying them back or having them be taxed close to 100%, the tax payer is already losing as these employees working out the problems that they did not create are already starting to resign. Yes, America and the taxpayer will not save $165 M but rather lose far more than we save as those working the issues are resigning.

So, why didn’t the new AIG CEO, Edward Liddy, defend the $165 M in retention bonuses in front of Congress this past week and explain to Congress that these were not performance bonuses paid to the people that got us into this mess? Why didn’t Tim Gheitner, U.S. Treasury Secretary, defend his decision to allow the retention bonus payments as outlined in the recently passed stimulus bill? Why didn’t Ben Bernanke, Chairman of the FED, defend the retention bonuses that were know by him since last summer? And of course, where was our Harvard-schooled president when we needed his articulation skills the most as he could have clearly explained and defended these payments so we would not have to rehire new employees for all of the AIG employees who are now turning in their resignations for having to repay their contractual retention bonuses?

In summary, our U.S. government has increased the exposure to the American taxpayers by not supporting the AIG retention bonuses being paid to the workers that did not create the problem and who are assigned to fix up the mess. This is cowardly leadership, in my opinion. It is an easy path to for our leaders to keep the AIG bonus discussion at a very surface level and say “bonuses shouldn’t be paid to business leaders that fail”. Well, of course, everyone agrees with that! But that is not what is being paid at AIG.

About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics, Accounting, Marketing, and Personal Finance. Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 10 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe.

14 responses so far

14 Responses to “America Has Gone Mad! (The AIG Bonus Payments Should Be Defended!)”

# Joyce Loganon 23 Mar 2009 at 3:57 am

Retention-schmention! Mr. Latter states a lot of things as fact. Where is the evidence that:

1. no bonus money was paid to people who have left AIG? I heard the opposite on the news channels.

2. no bonus money went to anyone who caused the very problems that sunk AIG? Again, I heard the opposite on the news channels.

3. the top 7 AIG execs are not taking any bonuses? I listened to part of the Congressional testimony, and Barney Frank asked for the list of names of people who were paid bonuses and the names of those who turned down the bonuses, and AIG said it would not disclose those names. If Congress can’t get those names, who got them? Is this public information that Mr. Latter has access to that he should share with Congress?

4. the next 43 execs were excluded from bonus money?

5. that no one who helped create the AIG problems is not receiving bonuses, no matter how you define them?

Please cite your evidence for these “facts.” Why didn’t the CEO of AIG state all of this on the record in the Congressional hearings? If he did and the media ignored it, then shame on the media.

“Retention bonus” is just a euphemism for “I will get my bonus one way or the other because I am entitled and I shouldn’t have to suffer any monetary loss even though my company and the public are.” This is Master of the Universe thinking.

I agree that the bonus money is a minute fraction of the total amount of bailout money paid out. That is not the point. The point is that in most other businesses, if you take ridiculous risks, which all economists say AIG did (I read that AIG borrowed $30 for every $1 it made), you suffer the consequences. Thanks to lack of Congressional oversight (Republican and Democratic) and greed, a few people made massive sums while the getting was good and before the house of cards could collapse. No one is even asking these people to give back the previously made money. We have been told that AIG and other financial institutions must be propped up because otherwise they will fail and we (and perhaps the entire world) will go into a depression. That doesn’t mean the people who work for AIG should expect business as usual when it comes to compensation now.

Obama put a hen (Geitner) in charge of the hen house. Geitner comes from the very industry that capitalized on lack of oversight and greed. Same with Bernanke, who teamed up with Paulson to hand over, strings free, massive amounts of bail out money. These two men see things through a different lense than the average American working slob. They were part of the problem. So if Obama wants them to help clean up the mess because they supposedly are the only people who really understand the problem, at least they took low-paying government jobs and presumably are not expecting to continue to reap millions while they’re at it.

Moreover, why should people be paid extra to clean up the mess they created? I would guess they have no where to go right now with all of the financial institutions on shaky ground so they should just be happy to have a job! So I have doubts that they need “retention” bonuses.
# Steve Latteron 23 Mar 2009 at 5:48 am

Hello Joyce,

You represent one of the many Americans that I was writing about in my blog that are upset at these bonus payments. I am not surprised by your response as it is similar to the vast majority of Americans.

Let me address your questions by your numbering scheme:

1. You said: “no bonus money was paid to people who have left AIG? I heard the opposite on the news channels”.

Response: You are correct. But why did you say “I heard the opposite on the news channels”. My blog was centered squarely on the recent bonus payments for CURRENT employees who were retained under AIG’s new management to fix the derivative mess created by the already fired AIG employees that caused it.

2. You said: “no bonus money went to anyone who caused the very problems that sunk AIG? Again, I heard the opposite on the news channels”.

Response: I have no hard facts for you on your question. I did not research that question. My guess is clearly that there were bonus payments of some type. But again, my blog post was centered squarely on the recent $165B in retention bonuses to CURRENT employees who are working to clear up the financial mess.

3. You said: “the top 7 AIG execs are not taking any bonuses?

Response: That is correct. I have heard this on the news several times. If you are looking for a written source I just accessed a Tuesday, March 17th Washington Post fron page article that confirms this. AIG’s top 7 officials, including CEO Liddy, have agreed to forego any bonuses though the end of this year.

4. You said: “the next 43 execs were excluded from bonus money?”

Response: That is not what I said in my orignial blog post above. I said that the current $165B retention bonus payout being so widely discussed did not include any monies for the next 43 highest paid executives. These executives have had their bonuses restructured with a larger portion being based on recovery of taxpayer money and the successful restructuring of the company.

5. You said: “that no one who helped create the AIG problems is not receiving bonuses, no matter how you define them?

Response: I can’t validate this to your absolute level of detail. The Financial Products division has “cleaned house”, the former CEO has been dismissed, and AIG has represented this.

Your frustration and position may be best summed up by this statement made in your comment:

“The point is that in most other businesses, if you take ridiculous risks, which all economists say AIG did (I read that AIG borrowed $30 for every $1 it made), you suffer the consequences”

What you say above is absolutely true. I addressed this very point in the last paragraph of my blog posting. But let’s not “throw the baby out with the bathwater” by overerreacting and taking away all incentive based compensation from the GOOD employees that are working these issues on a going forward basis. That is my main point. If the government wants this mess cleaned up, they need to pay GOOD employees to fix it. I say that retention bonuses for discontinued divisions with billions of dollars of derivative risk is prudent management and practiced by every single corporation that I have ever heard of!
# Jacob Welchanson 23 Mar 2009 at 11:05 am

“as these employees working out the problems that they did not create are already starting to resign.”

Is there an article or something I could read that reports on how all the workers that laid the foundation for AIG’s problem have been let go? It just seems hard to accept that it is only over-achieving successful workers still employed at AIG and collecting these bonuses.
# Steve Latteron 23 Mar 2009 at 5:15 pm

Hi Jacob,

Here is one article from the New York Times, reprinted with permission by the Seattle Times that you might find interesting:

http://seattletimes.nwsource.com/html/nationworld/2008891913_aigstaff20.html?syndication=rss

Also, you might want to check out the March 17th front-page story in the Washington Post on this very topic.

Regards,

Steve
# Debraon 24 Mar 2009 at 3:12 am

This is the first intelligent article on this subject that I have read.

In my opinion, this “outrage,” is manufactured by mainstream media, grappling for compelling stories amongst the dismal financial news. The same broadcasters who are screaming “outrage!” make large bonuses every year themselves, and they were also the same people who were praising many of these companies only a short time ago.

I, too, wish that at least one responsible party would take the time to explain exactly why the bonuses were received, and that it’s a small amount of money for a company of AIG’s size.

I also don’t understand how the media is defining “public,” as if the people who work for AIG are no longer a part of the public. Villianizing workers is really irresponsible. It reminds me of how sensationalized the beginning of the war in Iraq was.

I am a Obama supporter, but I am starting to understand why some governors didn’t want any parts of this money.
# Jacob Welchanson 24 Mar 2009 at 5:06 am

Thanks for the articles!

“The handful of people who championed the now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, most of whom never lost a dime for AIG, think they have been sold out by Congress and the president.”

I will say that I’ve learned a bit more about this situation and do feel a bit better about it. Thanks for that.

I also wanted to let you know that your website was a critical part of my survival plan last year as a first-year teacher and first-year AP Macro teacher. You’ve got a great resource here. I directed my students to it more than once.
# Steve Latteron 24 Mar 2009 at 5:35 am

Hi Debra and Jacob,

Thanks for the posts.

Here is the link to an excellent Washington Post article on the subject:

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/16/AR2009031602961.html
# Steve Latteron 24 Mar 2009 at 5:20 pm

Check this article out:

http://money.cnn.com/2009/03/23/news/companies/aig_resignations.reut/index.htm

Yesterday at 5:00 pm was the day the AIG bonuses were asked to be returned by the employees that are working out the derivative risk to protect the taxpayers money.

The above link report that yesterday afternoon a handful of AIG Financial Products’ executives responsible for leading the clean-up effort have resigned and that more employees of the 370-person, clean-up crew are about to to follow.
# Gary Williamson 26 Mar 2009 at 12:59 am

I think it’s not unlikely that the wrong people are being punished, tarred by association with the very name A.I.G. But what I’m not clear on is whether those who caused the debacle have suffered in proportion to their stupidity and greed. Sure, they may have lost their jobs…but how many of them have simply transitioned into some other highly remunerative occupation? And what became of the chief of the financial products unit and the CEO who failed in his supervision? Yes, they are no longer with A.I.G. But are they currently sleeping under bridges, or did they receive handsome payoffs to go away? I stop short of saying they should be taken out and shot, but perhaps if they had any sense of honor or shame they would have performed seppuku by now.

Now, the crime these guys committed was insuring assets without having adequate reserves. And they failed to provide adequate reserves because they assumed that housing markets could never go into decline. I don’t fault them for the assumption; I made the same one. But I didn’t get paid millions of dollars a year for being wrong.

Of course, that’s all looking backward. Is there a discussion here or anywhere on what steps can be taken looking forward to insure that no segment of the economy and no financial or other institution ever again becomes “too large to fail”?
# Steve Latteron 26 Mar 2009 at 2:37 am

Hi Gary,

Great points! Unfortunately, the modus operandi in Corporate America is still to make “severence payments” to executives as they are being dismissed or fired. So, I am only guessing but I would bet $1,000 to a $1 that the dismised AIG employees that created the decisions have all received a going away present call “severence”!

I think the executive compensation packages will start to change and severence packages or “golden parachutes” will become less generous with all the public scrutiny that is happpening. This is good. Executive compensation packages have risen too fast relative to the “worker bees” salaries. Today’s financial problems at least help us out for the future by creating visibility and pressure to make executive contracts less lucrative.

Here is a copy of the resignation letter from one of the key executives from AIG’s Financial Products division that just resigned this week:

http://www.nytimes.com/2009/03/25/opinion/25desantis.html?pagewanted=2&emc=eta1
# Gary Williamson 26 Mar 2009 at 2:47 am

Thank you for the gracious response.

I’ve looked over on the right-hand side of the page for discussions of the economics of compensation and the economics of “too big to fail”, but without success. Are these topics under discussion somewhere at this site that I have missed?
# Steve Latteron 26 Mar 2009 at 3:58 am

Hi Gary,

I think you found the “execitive compensation” blogs under the tab “Incentives” on the far right of our site.

Here are a few on “Too Big To Fail”:

http://www.time.com/time/business/article/0,8599,1886275,00.html

http://www.nytimes.com/2008/07/20/weekinreview/20goodman.html

http://corner.nationalreview.com/post/?q=MjdkYTc0MDJkMTQxZTEwZDQyOTNiOTVlYWQ4ZDkzNDM=

Hope this helps.
# Bjorn Borgerson 29 Mar 2009 at 10:49 pm

I very much agree with Mr. Latter, bonuses should be payed and defended. Whilst in this case these bonuses are retention bonuses, I also feel that the same should be said for performance bonuses. Sometimes these performance bonuses are even part of the work contract, and there should be absolutely no reason that these are not payed. It is however difficult to justify to the tax payers that these people deserve a bonus. Some may argue that without the bailout these people, among the many others, would be without a job, not even thinking about a bonus. Yet on the other hand, the incentive to perform even better than what is expected of one, is what could save a firm like AIG. These people should not only receive a retention bonus, but if they also perform even better than expected, they should receive a performance bonuses as well, since it could help to bring AIG to a healthy stand point again. Bonuses are obviously a very controversial issue, since it does lead to people taking larger risks, which some may argue has led to the crisis. I however like to compare bonuses to a payment for over-hours. If you work longer than is expected (by contract) of you, then you will receive extra pay (usually). This system is usually used in more labour intensive firms. Similarly if one performs better than expected, one can expect a bonus (if the firm has decided to embrace the bonus system). Whilst it is more difficult to measure “how well” one has done, it only seems fair to reward those who have done well.
# David Dzidzikashvilion 06 Apr 2009 at 11:16 am

After the government gave AIG bailout money, they should have used ownership rights and cancelled all performance bonuses and laid off the executives who have done nothing but run the company to ground. It’s is insane how AIG justified their action and rewarded failure. At the end of the day, it’s the US taxpayer that is getting screwed from left and right. How come nobody is thinking about bailing out the middle class that is losing jobs and homes? Maybe we should reward them instead of giving more cash to the greedy?