Some thoughts on… Paying for Performance
It’s in vogue to be bashing bankers these days. Why not? Their poor decisions are splashed on newspaper covers and highlighted by TV news anchors. Hollywood is on the bandwagon with the recent movie, The International, portraying multi-national banks as a source for “conflict banking” – funding strife in war-torn countries in order to secure financing on the debt that will inevitably ensue. Funding of weapons is passé, the real prize is the liability of payments on the country’s infrastructure.
AIG is the cause célèbre. Lavish retreats for the sales force, multi-million dollar salaries for top management, and now $165 million bonus to the staff that created the financial derivatives contributing to the company’s downfall – all funded by tax-payer bailout.
It’s easy to be angry at the foolish decision-making, but should the government try to “claw-back” these bonuses?
The recent payment is the second installment of retention bonus obligations worth $450 to the unit’s employees. AIG paid out $55 million already last year, and another $230 million is due in 2009. These payments are contractually required to be remunerated if the employee remains in the position through the year.
A confusion in terminology causes more chagrin in this case, because in fact these expenses are really not “bonuses” in the commonsense usage of the word. Waiters, service contractors, and private-sector employees receive incentive bonuses all the time. Depending on individual contribution and organizational performance, a bonus is provided at the discretion of management. Ironically, the AIG payouts are provided as long as the employees stick around in the company – regardless of how well or poorly they perform.
There may have been sound reasons for creating the types of contracts a few years ago. The white hot labor market for hedge fund bankers incented companies to create high-stake offers and allowed individuals to demand them. With a skyrocketing market, the bonuses would pay for themselves in a matter of time. With a crashing market, AIG calculates that we now need to retain these individuals more than ever, so they can get out of this mess.
There’s enough blame to go around:
- The management of AIG for creating these contracts to attract the talent
- The Federal Reserve keeping interest rates so low that it created a surplus of capital in the markets
- The government and treasury who should have been aware of these payments and informed the tax-payers ahead of time
- The CEO of AIG who could have abrogated the contract in the face of dire circumstances
- The American public for being surprised that a company will be using bail-out money for its own purposes
- The Congressmen who are trying to kowtow to their constituency by finding an easy scapegoat for the financial mess
‘If we assume that we can’t change the past and that AIG’s bankruptcy will only lead to a worse financial mess, then the only solution is one that’s forward looking.
The government can impose income taxes on the bonuses, so that it retrieves the money, but this is a token display to appease the anger of the public. The retention contracts account for 0.2% of the $180 billion that the government has already given to the company. The benefits of retrieving this paltry sum for the taxpayer, is easily outweighed by the legal and systemic costs of the action. The amount of time and energy that is being diverted to resolve this fire-drill is better applied to making the toxic-asset buy-back program more successful.
A possible solution to the mess is appealing to the moral integrity of the AIG hedge-fund managers – ask them to voluntarily pay back the retention bonuses. A fundamental belief of our capitalist structure is that people should be rewarded for good performance. When the systems en-masse fails to create such a system, then it’s up to individuals to make the re-alignment. Friends, family, and the general public should ask for contrition from these individuals – don’t keep money that you don’t deserve, and instead, help fix the problems. This requires a great deal of humility amongst the individuals and requires the public to acknowledge the actions for those who comply. But it may be an efficient mechanism to resolve the issue.
Broadway’s in on the pay for performance game as well, but with a much more virtuoso presentation. The new musical, Happiness, on for a limited run through June at the Mitzi Newhouse is an ebullient musical wrapped around a morality tale. The show describes how our everyday actions and choices inevitable confront us later down the road. The true measure of how to live our lives is in the happiness we create for others and ourselves. Success along this metric is paid off in an infinite re-living of those moments; those who fail are in for a dreary trip. It is easily the best new show of the season and should receive the Tony award for best new musical immediately.
Maybe the folks at AIG should be focusing on creating some happiness in the world rather than just filling their own pockets.
March 21, 2009
AIG is the cause célèbre. Lavish retreats for the sales force, multi-million dollar salaries for top management, and now $165 million bonus to the staff that created the financial derivatives contributing to the company’s downfall – all funded by tax-payer bailout.
It’s easy to be angry at the foolish decision-making, but should the government try to “claw-back” these bonuses?
The recent payment is the second installment of retention bonus obligations worth $450 to the unit’s employees. AIG paid out $55 million already last year, and another $230 million is due in 2009. These payments are contractually required to be remunerated if the employee remains in the position through the year.
A confusion in terminology causes more chagrin in this case, because in fact these expenses are really not “bonuses” in the commonsense usage of the word. Waiters, service contractors, and private-sector employees receive incentive bonuses all the time. Depending on individual contribution and organizational performance, a bonus is provided at the discretion of management. Ironically, the AIG payouts are provided as long as the employees stick around in the company – regardless of how well or poorly they perform.
There may have been sound reasons for creating the types of contracts a few years ago. The white hot labor market for hedge fund bankers incented companies to create high-stake offers and allowed individuals to demand them. With a skyrocketing market, the bonuses would pay for themselves in a matter of time. With a crashing market, AIG calculates that we now need to retain these individuals more than ever, so they can get out of this mess.
There’s enough blame to go around:
- The management of AIG for creating these contracts to attract the talent
- The Federal Reserve keeping interest rates so low that it created a surplus of capital in the markets
- The government and treasury who should have been aware of these payments and informed the tax-payers ahead of time
- The CEO of AIG who could have abrogated the contract in the face of dire circumstances
- The American public for being surprised that a company will be using bail-out money for its own purposes
- The Congressmen who are trying to kowtow to their constituency by finding an easy scapegoat for the financial mess
‘If we assume that we can’t change the past and that AIG’s bankruptcy will only lead to a worse financial mess, then the only solution is one that’s forward looking.
The government can impose income taxes on the bonuses, so that it retrieves the money, but this is a token display to appease the anger of the public. The retention contracts account for 0.2% of the $180 billion that the government has already given to the company. The benefits of retrieving this paltry sum for the taxpayer, is easily outweighed by the legal and systemic costs of the action. The amount of time and energy that is being diverted to resolve this fire-drill is better applied to making the toxic-asset buy-back program more successful.
A possible solution to the mess is appealing to the moral integrity of the AIG hedge-fund managers – ask them to voluntarily pay back the retention bonuses. A fundamental belief of our capitalist structure is that people should be rewarded for good performance. When the systems en-masse fails to create such a system, then it’s up to individuals to make the re-alignment. Friends, family, and the general public should ask for contrition from these individuals – don’t keep money that you don’t deserve, and instead, help fix the problems. This requires a great deal of humility amongst the individuals and requires the public to acknowledge the actions for those who comply. But it may be an efficient mechanism to resolve the issue.
Broadway’s in on the pay for performance game as well, but with a much more virtuoso presentation. The new musical, Happiness, on for a limited run through June at the Mitzi Newhouse is an ebullient musical wrapped around a morality tale. The show describes how our everyday actions and choices inevitable confront us later down the road. The true measure of how to live our lives is in the happiness we create for others and ourselves. Success along this metric is paid off in an infinite re-living of those moments; those who fail are in for a dreary trip. It is easily the best new show of the season and should receive the Tony award for best new musical immediately.
Maybe the folks at AIG should be focusing on creating some happiness in the world rather than just filling their own pockets.
March 21, 2009