AIG Bonuses
I was asked twice yesterday about my opinion on the AIG Bonuses so I figured I would put something together.
I am using the following 2 articles as the basis:
- New York Times, In Online Forums, AIG Bonuses Touch a Nerve
- CNN, 73 at AIG Received Bonuses of $1M or More
Here are the facts that I have come up with:
1. “The insurer has accepted more than
2. “The
3. “AIG has said it is contractually obligated to pay the bonuses and will make efforts to reduce the retention payments by at least 30% in 2009.” (CNN)
To summarize, AIG is contractually obligated to pay out $450M in bonuses throughout 2009, while they have received roughly $170B from the US governement.
My thoughts:
1. The $450M paid out was contractually obligated – AIG has no choice. In addition, its interesting to note that $450M is .26% of the overall money they have received from the US Government.
2. “This is absolutely disgusting,” wrote Adam, from Los Angeles. “Any such contractual obligations should be broken. The company should be fully nationalized and the people who brought it to its knees, along with the economy as a whole, by manufacturing derivative contracts and obligations that the company lacked the capital to meet, should be put in jail.” (NY Times)
—It is easy to say that contractual obligations should be broken, but why should they be broken? Do you know what the contract said Adam? Would you be OK with your company paying you half of what your salary was negotiated at?
So far as nationalizing AIG and putting employee’s in jail, the company is already 80% US Government owned. And, think about it, are you going to remove all of the top executives (lets say the top 5% in rank of employee’s)? Then what? Who runs the company? Who knows how this business actually works? The US Government … ? Clearly.
3. No real comment here, but judge for yourself:
“Senator Charles Grassley, Republican of Iowa, who has suggested that company executives should ‘resign or go commit suicide.’ ” (NY Times)
4. “Let’s put A.I.G. exactly in the same spot as G.M., wrote Yoandel of Boston, in response to a Dealbook column by Andrew Ross Sorkin. “Let the A.I.G. bonus recipients negotiate with A.I.G. management. The principle will be this: If you do not negotiate the bonuses down, then the U.S. government will call its investments in A.I.G. and will withhold the 30 bln remaining.” (NY Times)
—Sorry Yoandel, but why should the employee’s have to negotiate with the US Government? They don’t work for the government, they work for AIG and are paid under their contracts. If you want to say that AIG is owned by the government, fine, but then why didn’t the government step in prior to this as these contracts were written in early 2008 when AIG first received money from the US Government.
Hoping that I’ve added a bit of fuel to the fire to spark some conversation. What are others thoughts and feelings?
I don’t know how these bonuses are earned. To me, a bonus is something given or paid in addition to what is usual or expected. I think a bonus would be for work done above and beyond the job description. Maybe AIG and other companies should rethink this idea. If these bonuses are for retention of “top talent” and (as I understand it) some these departments were at the forefront of this debacle, where is the accountability? Does AIG want to retain these employees? Contract or not, it sounds as if some of these bonuses are unethical.
These are my thoughts and are not based on a lot of research. Anyone can spin this to their liking.
I like Harvard Economist Greg Mankiw’s comment yesterday on this…
“The AIG bonuses now being debated in Congress and everywhere else represent about .001 percent of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.
Yes, I know, that calculation is silly in many ways, but here is my point: Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.
Unless, of course, you think that our elected leaders are more likely to make things worse than better. In that case, jabbering on about the AIG bonuses may be the perfect activity to keep them busy.”
A contract is not a contract, at least in labor law. When a company goes through bankruptcy, the judges throw out labor contracts if they are not renegotiated with significant downside. Fact. I am an airline pilot and our wages have decreased inflation-adjusted 60% in 7 years! Besides wages, my contract also had many other benefits such as a nice pension, better health care, and better work rules for a more pleasant working environment. That’s all gone now. Why now do the executives get to keep their contracts when a company is nationalized?!?! This is basically bankruptcy, too! I completely understand globalization and I’m not here to defend the past labor contracts in the modern world, but I’m completely sick and tired of management team compensation packages increasing at 15-20% annually while my family is funding their pockets. No wonder they keep cutting their dividend, the equity is being soaked up in lavish parties and huge bonuses!
I also read in an article on Google News that if they did not pay the bonuses, AIG could be sued and could end up paying double or even triple the original amount.
It would be the American tax payers that would end up fronting that money.
Michael. Why couldn’t the pilots sue my company when our contract got stripped after bankruptcy? It is a double standard which has brought down trust and dignity in this country, which has escalated in the past decade.
I've done some digging on this myself and though I tentatively concede that AIG may have had contracts that stipulated bonus payment, I disagree that the company had no choice but to pay them. This is based in the 4th paragraph of NY Attorney General Cuomo's letter to the House Financial Service Committee.
I also disagree with the notion that these were at all "retention" bonuses as it has come to light that several of the recipients are actually no longer with AIG.
I also disagree with the anger directed at Congress under the notion that the government missed the opportunity to influence these bonuses in the way they forced contract negotiations between the auto makers and the UAW, though these negotiations would not have been, as you put it, between the AIG employees and the government – they would have been between AIG and its own employees with the understanding by AIG that federal aid would be depended upon the outcome of their negotiations.
It's important to remember here that the bailout provided to AIG last year was not orchestrated, approved, or even negotiated in Congress – the Federal Reserve acted in their authority to provide this early money and they simply presented Congress with their actions.
This obviously means that Tim Geithner (having been in power at the Fed during this time) has some real explaining to do.
The Cuomo letter for reference: http://www.docstoc.com/docs/4986046/?key=NTMyY2M5ZTkt&pass=YWNkNS00ZTIx
“And, think about it, are you going to remove all of the top executives (lets say the top 5% in rank of employee’s)? Then what? Who runs the company? Who knows how this business actually works? The US Government … ? Clearly.”
Clearly the people who have been running the company don’t know how the business works, either, though. Or if they do, they’ve been so grievously fraudulent in their dealings, that their ethics alone should be enough to remove them from their position. I have a hard time believing that only a handful of criminals are capable of running these companies, or that it takes a multi-million dollar salary to make it possible for a person to do their job. That threat of, “Well who else would be able to do this job?” It’s completely empty, and moreover, completely laughable in the face of such blatant mismanagement.
And this blog is supposed to be about having good “sense”?
Katie,
Good feedback.
“It’s completely empty, and moreover, completely laughable in the face of such blatant mismanagement.” I realize this is a stab at my comments regarding the removal of all officers within AIG and how this would not help, but I’m struggling to find where your comment holds any substance either. What are you suggesting?
Since this news story has broken it has been a giant explosion of whining, complaining and pointing fingers. My points in the blog were under-lining the actual facts that AIG employee’s were paid based on contracts written last year, which the government had insight into. Furthermore, these were retention contracts to ensure top executives stayed in place.
I’ll make the assumption that you are wondering why we would ever want AIG execs to stay in place since as you stated they are nothing, but “grievously fraudulent in their dealings [and] their ethics alone should be enough to remove them from their position.” Many companies in the US and elsewhere have failed over the past 18 months. Many more companies have lost 50% or more of their market cap. Does this mean the execs are criminals? Or lets relate to the small business owner that has to shut their doors as American’s close their wallet’s. Their business has failed – are they criminals? No, but are they the best to bring back that business – most likely.
If there were a world without laws (and contracts), this event would strike me as extremely abnormal. However, we do not live in this world and someone made the decision (including the US government) to allow these contracts to exist.
So what are we left with? We’re left with a mess and we need a solution. However, I don’t think dwelling on the past (and spending millions more to investigate) will solve anything. We need to answer questions like, how can we prevent this from happening again? Any ideas?42
Will. I am interested in picking your brain. In your opinion, why do you believe labor contracts are thrown out in bankruptcies but executive contracts are not? I don’t know if people are aware or not, but when Leo Mullin left Delta he took a multimillion dollar severance package all while the pilots took a billion dollar pay cut. At American Airlines, management took a several hundred million dollar bonus in the same year pilots gave up an unprecedented amount of compensation. At United, when emerging from bankruptcy and after over a billion dollar of concessions by the pilots, Glenn Tilton and Company demanded over 8% equity stake in the new emerged company. Do you believe this is fair? I am interested in hearing your view of contracts and where the enforcement line must be drawn for the future prosperity of our economy.
James,
Your specific question would take days, possibly months of research to completely answer as I lack a law degree or any law background for that matter. However, here are my thoughts on your note:
1. I am not intimately familiar with Delta or United’s bankruptcy other than that they both filed under Chapter 11. Chapter 11 is purely for those businesses that can reorganize under the law in order to make a profit over time. In doing so, I would imagine that docking the pay of workers, including pilots is a viable option. The companys goal at that point is very simple – cut costs to ensure a return or be forced to file for Chapter 7 which results in the unfortunate and certainly more painful liquidation of the company.
This does not answer the question of why executives get large payouts when they may be solely or partially to blame. But, standing behind the fundamentals of how a public company is run, this is in the hands of the board of directors and the share holders. If contracts are awarded or shredded this is done more so by the BoD then any one executive. Furthermore, while filing for bankruptcy I would assume that the judge involved should be issuing judgment on all outstanding contracts.
2. Regarding your 3 airline scenarios and your question of do I believe this is fair? In my opinion, fair is not a word that should be used unless it is used in a statement like “fair market value”. In this case, it seems that pilot pay was slashed across the board meaning that there was a market correction in pilot pay. Any time this happens there are generally two scenarios. One, everyone leaves their jobs because they are not being paid at or above their market value. They find work elsewhere, making more money and they are happy. Two, everyone stays in their jobs because they realize that anywhere else they go they will get paid the same amount of money (market value).
I generally use a baseball analogy for this. Everyone complains about how much baseball players get paid. But, think about it, they get paid $10, $20, $30 million a year because that is their market value. If the Cubs want an all-star and are willing to pay $10 million it’s because they know others will be paying him $8 or $9 million and want to ensure they keep this resource. Likewise in business, resources are generally paid the amount that will keep them in their positions (one of many factors).
Hopefully this gives you some insight into how I think through these interesting times. As you may have seen my post about a reduced salary as of late, I feel your pain. Although I might not think this is fair, I’m not exactly searching for a job either – I’m being paid what the market dictates.
Will, I enjoyed reading your post. You think exactly like I do when it comes to balancing the power of business.
My point is that there is a double standard of contracts, one for labor law and another for the boys who make the rules. The BofD, in many instances, are the executives’ Country Club pals and even hired by the executives themselves under many conditions. The market of executive pay you speak of is the market largely created by the executives themselves. So how can a “free market” of executive pay truly be independently free?
I have been studying the business world closely for some time now, and I have found that when it comes to compensation the executives instill fear that the business world would abruptly cease to exist if their pay were slashed. Certainly no one else can do it for only $3 million per year! The free market, industry standard dictates others are making $45 million per year! Here’s the thing. Yes, others are making $45 million, but it is because the guys running the show are all helping each other out steal from the bank (i.e. my equity as a shareholder). And the shareholders in our current structure have very little power, and what power they do have is effort prohibitive to undertake correction. In addition to your and my salaries, the real “correction” we need in the business world is increased shareholder power. Then and only then will executives come to learn that everyone must play by the same contractual rules, which means slashed pay for executives and labor alike during bankruptcies and tough financial times.
“I’ll make the assumption that you are wondering why we would ever want AIG execs to stay in place since as you stated they are nothing, but “grievously fraudulent in their dealings [and] their ethics alone should be enough to remove them from their position.” Many companies in the US and elsewhere have failed over the past 18 months. Many more companies have lost 50% or more of their market cap. Does this mean the execs are criminals? Or lets relate to the small business owner that has to shut their doors as American’s close their wallet’s. Their business has failed – are they criminals? No, but are they the best to bring back that business – most likely.”
My point is two-fold:
1. In the face of such utter failure, most businesses will not maintain the same leadership, regardless of the reasons behind it.
2. The financial industry was not a hapless victim of the recession, nor was its failure a mere byproduct of the recession, making it different from most other industries which have been affected by the recession. The economic failure at this point can be blamed almost entirely on irresponsible lending on behalf of the financial industry, run by people who were educated enough to know better. However, for the sake of short-term profitability, they employed irresponsible and reckless lending policies. While this was not outrightly criminal, the behavior was certainly unethical. The financial sector did not fail because people decided to cut spending due to economic instability, as almost every other industry is now experiencing. They failed because they made bad–appallingly bad–loans and investments. They aren’t cutting employees or cutting back spending because people are no longer buying their products. They are being bailed out because they made truly rotten business decisions, and whether because of incompetence or bad ethics, I would argue those in top-level positions have proven themselves unworthy of their lofty positions.
If this handful of businessmen is the best America has to offer in terms of financial leadership and knowledge, I would have to say it’s a shocking statement about the quality of American education. However, I don’t believe that and believe that leadership should be turned over to people who would be better equipped to do their jobs.