AIG Bonus Silliness

Here is the bandwagon of the day: writing pointless articles about the huge bonuses AIG paid out to many of its executives, even some that no longer work there. In addition to the outrage being spurred on by camera-hungry politicians we have journalists and bloggers jumping in, arguing on one side or the other of this issue. I am going to do neither in this post. My opinion is that, regardless of legal and ethical questions, this issue of the bonuses is neither material nor unusual.

Mr. McConnell: “It’s shocking that they would — the administration would come to us now and act surprised about these contracts. Why didn’t they ask the question two weeks ago, before they gave them $30 billion?”

It is not material to the bigger picture - that of avoiding wholesale systemic failure in the insurance counter-party market. The amount of money represented by the bonuses is about 0.1% of the public funds injected in this aspect of AIG's business commitments. To almost everyone, the numbers involved in the individual and total bonus amounts are insanely high. While emotional responses may range from envy to questions of 'fairness', this has always been true when the majority view the rich minority. There is no fairness in our capitalist economy; you don't get what you deserve, you get what you can.

Remember that what regulators were most worried about at the time was systemic risk. Whether or not AIG deserved the money was pretty much beside the point: the key thing was that if it didn't get the money, the entire global financial system would be put at risk of collapse. In which light, the cost of the AIG bailout looks positively modest, compared to its benefit.

The second matter is the whole concept of corporations paying bonuses in the face of non-performance. Has no one ever worked in a large corporation before? This is standard practice. Bonuses for individual performance (however measured) are often small compared to broad distribution of options and cash when the profits are rolling in. If the corporation is doing poorly, bonuses for individual performance are reduced and restricted to a select few. In other words, individual contribution typically has little to do with the size of bonuses but a lot to do with the overall profitability of the corporation.

I saw this myself in local companies like Mitel and Nortel. When times were great, we employees were like pigs at the trough. Management kept pouring in the cash and we took it. When times were bad, we got nothing. In between these extremes was when games were played over individual performance. Senior management allocated the pool and it was dispersed to each succeeding level of of the corporate hierarchy according to some shifting notion of performance. In reality, management and employees knew it was all a charade. The differences paid out to high and low performers was rarely substantial. It was never about performance.

Barney Frank: ‘No, I’m not paying you the bonus. You didn’t perform. You didn’t live up to this contract.’

AIG is no different. Times were good and employment contracts set the terms for bonuses for senior staff. That the profits came to a sudden stop means little. They were paid on the corporate numbers over the period during which the bonuses were calculated.

There is some talk now of amounts paid to retain talent. However as many commentators have noted, if they wanted to leave AIG where would they go? Maybe the representatives of AIG's new stockholders, the government, can focus on that instead. If they don't like the quality of the talent, fire them. That's the proper, corporate, way to reward poor performance, and not by debating bonuses.