AIG’s big bonuses: Do companies really need them?

U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke
REUTERS/Kevin Lamarque
With protesters behind them, Federal Reserve Chairman Ben Bernanke, right, and Treasury Secretary Timothy Geithner prepare to testify at today’s House Financial Services Committee hearing on AIG.

Congratulations to everyone who roared in protest over executive bonuses at American International Group. You shook loose some of the cash.

Fifteen of AIG’s top 20 bonus recipients gave all of the money back. In all, some $50 million was recovered, New York Attorney General Andrew Cuomo told Bloomberg Monday.

To be sure, many in AIG’s executive offices around the world have refused to give back their shares of the $165 million the company paid in bonuses after it took more than $170 billion in bailout money from the taxpayers.

But more than the money, the give-backs raise hope that the Big Bonus Hoo-hah finally registered a clue in the minds of executives who had seemed so utterly impervious to the suffering their mistakes have caused across America and around the world.

Where are the leaders?
What we urgently need from the executives at this moment of this crisis is competent leadership, said Michael Naughton, a University of St. Thomas professor who specializes in ethics and law.

Michael Naughton
St. Thomas
Michael Naughton

These are people with vast knowledge about the broken financial system. And, even in their weakened state, they hold significant power to help fix it.

For starters, Naughton said, “executives need to show they are taking on sacrifice” in a sincere bid to get us out of this mess.

What if executives at all of the bailed-out firms called a news conference today and announced that they were taking large pay cuts, forgoing all bonuses and deploying all of the resources at their command to help resolve the crisis?

That would be just a beginning toward Naughton’s vision. Next, these leaders would deploy promises of – gulp – bonuses to be paid when the financial system reached clear benchmarks on the way to recovery.

Beyond the sums of money involved, what is so wrong about the bonuses at issue right now is the timing and the question of what, exactly, is being rewarded.

“What you could do is set up a system that would say, ‘If you can get us out of this crisis, there will be incentives and there will be rewards,'” Naughton said.

And the carrots would be offered not just to executives but to workers throughout the ranks of the companies that threw themselves into recovery projects. Teams of workers would be motivated, and the nation would begin to regain trust in its financial sector.

Defusing the bomb 
In that scenario, even the much maligned retention bonus could make sense.

Amid the furor over the AIG bonuses, people seem to have fixated on the notion of a bonus as a reward for work well done. But that’s a performance bonus, not a retention bonus. Used correctly, a retention bonus is a tool for keeping someone the company needs in order to get through a rough patch.

Unpalatable as the thought may be, the taxpayers need to keep AIG’s executives on the job right now, Andrew Ross Sorkin argued on the New York Times Dealbook column

“AIG built this bomb, and it may be the only outfit that really knows how to defuse it,” he said. “AIG employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against AIG’s book. Why not? They know how bad it is. They built it.”

Not that any of this takes the bite out of paying bonuses that were promised last year before the full extent of the problems became clear.

At least 73 AIG employees were paid more than $1 million each in bonuses, Cuomo said Monday. The highest bonus was $6.4 million, six employees received more than $4 million each, and 15 received more than $2 million. And some recipients have declined to return the money.

“Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg,” Sorkin acknowledged.

But another possible explanation, he said, is that AIG knew it needed to keep its people to help resolve the crisis that was coming.

Indeed, that is the argument made by Edward Liddy, who was installed as AIG’s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.)

Stuck in the bomb-creating mindset
Alfred Marcus is skeptical about the notion that AIG and the other failed firms needed to keep so many people at so high a price.  He is a professor of strategic management at the University of Minnesota’s Carlson School and the author of the recently published book “Big Winners and Big Losers, The 4 Secrets of Long-Term Business Success and Failure.”

Alfred Marcus
U of M
Alfred Marcus

“If they are still in the bomb creating mindset, you don’t want them around,” he said. “They are not useful….They are accustomed to certain privileges and they are reluctant to give them up regardless of their performance. They don’t really get it [that] they are civil servants right now.”

True, there may be a few people who are critical and irreplaceable, he said. But for most of them, “replacements should be readily available,” given the high unemployment in the insurance and financial sectors right now, Marcus said.

“You need some of them, you don’t need all of them, and the ones you want to keep around need to have a very different mindset in terms of what they are doing and how they are going to get paid for it,” he said.

So far there has been little evidence of that change of mindset. And the change may never come, judging from points Marcus makes in his book. Companies that are big losers tend to get stuck in sour spots of their own making. They are stubborn about holding their spots, but they also are inept in defending and protecting them.

The shock of the public backlash against the bonuses may shake some of the executives from their rigidly held positions.

But Marcus is not optimistic that will help us.

“A lot of these companies get shocked and they wither away,” Marcus said. “They survive, but they are not vital forces….Distinctive competence becomes distinctive incompetence.”

And don’t forget that moral consciousness did not seem to strike the AIG executives until they were prodded by a national uproar and a measure of frontier justice. Vigilantes in the U.S. House took aim where the executives’ hearts appear to be — in their pocketbooks – by trying to tax away the bonuses.

To be sure, the sheriff in the White House said that such a tax may be neither legal nor wise. But Cuomo and his posse still were in hot pursuit.

This modest refund of a fraction of the bonuses doesn’t look anything like the leadership the nation needs from this crowd.

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (3)

  1. Submitted by Bernice Vetsch on 03/24/2009 - 12:42 pm.

    An Alaskan activist working to achieve reparations from Exxon for the still-unaddressed pollution from its oil spill in a fishing area that will never recover was a guest on Democracy Now this morning. The courts have lowered the amount sought from Exxon to what they earn in profits in about four days — which still hasn’t induced Exxon to actually pay it all.

    She recommends destroying the power corporations have over our government (including the courts system)the removal of the right of corporations to claim “personhood.” She hopes to do this with a constitutional amendment to prevent them from continuing to use the 14th Amendment as justification for, among other things, calling the kazillions of dollars they spend to propagandize us and elect friendly lawmakers “free spech.”

    Since the 14th Amendment doesn’t specifically mention corporations, perhaps legislation (which is much faster) could be used to take away that pseudo “right.” In the meantime, I recommend the full public financing of all federal-level campaigns.

  2. Submitted by Craig Westover on 03/24/2009 - 04:02 pm.

    There are two kinds of questions here, and it is extremely dangerous to mix them.

    The first question is, “Is it necessary to pay AIG executives huge bonuses?” Related is the question, “Is it ethical (or fair) for AIG Executives huge bonuses?” Those are practical and moral questions.

    The second kind of question is the political question, “Should government do something about the AIG bonuses?” This is a legal and constitutional question that has absolutely nothing to do with how one answers the first kind of question.

    It does not matter if the AIG bonuses are necessary or not or if they are ethical or not in order to decide if government intervention is allowable. That is a separate constitutional issue, and I’ll be damned if you can find a clause in the constitution to justify the proposals coming out of Congress to deal with the situation – of course, there is no constitutional justification for the initial bailout either.

    Once a threshold constitutional principle is breached, there no longer is any effective limit on government intervention. Okay, the AIG bonuses are too big. What’s the right number? Who should get them? What about regular salaries? How about other companies getting bailouts? How about companies doing business with companies getting bailouts – secondhand subsidies so to speak? Shouldn’t government regulate the bonuses in those companies since they are indirectly benefitting from taxpayer dollars?

    That small minds are outraged by the size of the AIG bonuses is no surprise; that there are not more people outraged by the wholesale disregard for constitutional government is disappointing and frightening.

  3. Submitted by Karen Schell on 03/25/2009 - 03:00 pm.

    “And don’t forget that moral consciousness did not seem to strike the AIG executives until they were prodded by a national uproar and a measure of frontier justice.”

    We also have to keep in mind the “outraged” was manufactured and exported from the Obama administration which, though it had been fullly aware of the bonus payments, only later decided that faking “outrage” was a politically expedient road to divert away from the core issues.

    I’d venture most folks are not in favor of any entity, government or private, deciding if they “deserve” raises or bonuses (other than their own employers, of course).

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