AIG’s legally-binding bonuses?

2009/03/16

I’m sure that I am not the only person who’s a little mystified and annoyed by AIG’s multi-million dollar bonus payouts after begging the federal government (and, by extension, all of us loyal taxpayers) for money they supposedly needed to continue operations. This, after their shoddy business practices led them to billions of dollars in losses. And now, they’re rewarding the folks who steered them in this direction?

AIG’s CEO is arguing that these bonuses are legal obligations of the company [1]. Come again? How can a company be contractually obligated to pay bonuses, even when the company is faltering? Are these performance bonuses, and, if so, how does the company justify paying them for such abyssmal performance? If they are not performance based, why aren’t they, and why are they called “bonuses” in the first place? Even if these “bonuses” are part of the contracts for the employees involved, I doubt that I am alone in thinking that nearly bankrupting one’s company constitutes a massive breach of contract on the employees’ part! Supposedly, the bonuses are also intended to retain valued employees, instead of letting them find jobs elsewhere. Right. Valued employees. Last time I checked, if my job performance caused my employer to lose billions of dollars, my value to the company would be roughly on par with a carrot, and their contractual obligations towards me at that point would probably amount to physically throwing me out on the street.

Contracts are re-negotiated all the time; they are declared void if one party (or both parties) to the contract does not perform their obligations – contracts are not one-way blind. There are responsibilities on both sides of the agreement, and a failure on either side to fulfill their respective contractual terms generally nullifies the contract. As to the question of who bears fault for breaching the contract, it depends on who first failed in their obligations. I would argue that, in this case, the employees failed the company first, unless one can somehow argue that bankrupting one’s company counts as successfully serving the interests of said company (note: if you can, I would really like to see your reasoning, if only because it seems to defy conventional logic as I understand it). I’m not opposed to the sorts of bonuses and incentives that companies offer to retain their employees, but does it not make sense to tie such incentives to some kind of productive performance for the company? Or to deny them in the case of poor performance?

It would be annoying if the company were still paying out these bonuses out of their own funds, but in such a case, I wouldn’t much care, since it is not against the law to make stupid decisions. But we, as a nation, are currently bankrolling the operations of AIG in a massive way, so is it too much to ask for the company to exercise some modicum of restraint with our money? And on the government side, is it too much to ask for a little more oversight in how the money gets spent once it flows into the hands of institutions who, by their recent decisions, have shown themselves to be financially irresponsible? Would you hand over a thousand dollars to someone who just lost five hundred at a slot machine? Because that’s more or less what’s happening here. I may not be paying taxes at the higher rates I once did, but it is still partially my money that is now subsidizing AIG’s continued existence. I find it appalling that my money (and that of many other responsible Americans) is being used to finance the continued employment of the financial geniuses whose brilliant actions led to the conditions that deprived me (and again, many other responsible Americans) of my job, through no fault of my own. Someone needs to explain to me why my hard-earned money should be doled out to help companies retain such highly-valued employees, while I, and many others, struggle to find work in the economic environment that their recklessness framed for us all. Why should the federal government help these employees retain their jobs, when millions of others have lost their jobs and/or retirement funds as a direct result of said employees’ actions?

Oh sure, the administration will undoubtedly argue that the AIG bailout was engineered by the previous administration, but given their spendthrift predilections to date, I wonder if they would have handled matters differently. Besides which, the whole practice of blaming everything on the previous administration is starting to wear a little thin. Even if we accept, for the sake of argument, that the previous administration was the only entity at the wheel, what were these fairweather critics doing as the ship was headed for disaster? What did they do (or fail to do) to prevent the crisis we now face? The government does not function alone at the whims of the executive branch (read your Constitution, folks); keep in mind that the Democrats held majority control in Congress for the last two years of the Bush II administration. Did they see this crisis coming, and, if so, what did they do to prevent or forestall it? If they didn’t see it coming, why not? And if they were so concerned with how the bailout money got spent by AIG, what did they do to ensure proper oversight? The Federal Reserve does operate mostly independent of direct government control, but it is still subject to Congressional oversight and regulation (that’s right, Congressional oversight, not Executive – Congress is responsible for regulating commerce within the nation [2][3]), so who really dropped the ball here, I wonder?

Sadly, I fear that I will not find satisfactory answers to any of these questions.

Notes:

[1]: CNN article, 15 March 2009: http://www.cnn.com/2009/US/03/15/AIG.bonuses/index.html

[2]: U.S. Constitution, Article I, Section 8, Clause 3 (the so-called Commerce Clause)

[3]: Correction: I should say that this is how I think the responsibility should be doled out. As seems to be growing more common in our wonderfully bloated government, there seems to be quite a bit of disagreement WRT who is/should be responsible for policing the Fed. Quis custodiet ipsos custodes? Seriously.

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2 Responses to “AIG’s legally-binding bonuses?”

  1. MI Says:

    Megan McArdle had an interesting thought on the AIG bonuses:

    http://meganmcardle.theatlantic.com/archives/2009/03/what_do_do_about_aig.php

    IMHO, at least some of the fury re. AIG bonuses is misplaced. The real issue is financial industry compensation in general. Assuming, arguendo, that it’s too high, methinks a better approach would be industrywide limits (e.g., via statute or generally-applicable taxes), rather than targeting one company at the time. The latter approach merely hobbles the affected companies as talent inevitably migrates elsewhere.

    Of course, things get even more complex when one recalls that the financial industry is globalized, and that brain drains can happen to nations as well as companies. Perhaps capital controls – E.g., only US-domiciled banks run by US management subject to US compensation laws may make loans in the US – could solve this, but those are problematic for other reasons.

    • seeker312 Says:

      Believe me, I don’t disagree; the bonuses situation is systemic. AIG just happens to be the most visible example at the moment. The notion of contractually guaranteed bonuses rubs me the wrong way, mostly, I’m sure, because of the part of me that favors meritocracy. Industry-wide standards would probably the least painful option, but only if it is implemented on a global scale. Given the financial woes being felt all over the world at the moment, it is not beyond the realm of possibility that such standards could be implemented in a relatively amicable manner. Probably a larger concern is whether or not the financial institutions themselves would accept such limitations, and any country that is willing to let them have a free hand could end up enjoying the benefits of their services in a disproportionate manner.

      The protectionist side of me likes the notion of American-only companies doing business here, but again, as you mention, I doubt it’ll work out in the long run, especially if we’re the only country doing such things.

      Of course, if we blew up all the other countries in the world, we wouldn’t have such concerns, but that would open up an entirely different can of worms…


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