Thursday, March 19, 2009

AIG, Bonuses, and Contracts- Oh my!

I am not an expert on the economy, the crisis, recession or anything in or near that vein. I'm an armchair politician, I suppose. Hearing the news reports and jumping to conclusions based on the scant amount of information provided. Case in point- AIG and the $165 million in bonuses provided to employees after accepting $182 Billion in government bailout money. Apparently there is a contract that promises bonuses to these employees. Edward Liddy, who came out of retirement 6 months ago to head up AIG to work with the government (and is being paid $1 per year), has gone on record as saying he finds the bonuses to be "distasteful." I work in contracts. I negotiate deals. And I want to know who had the brilliant idea to give these guys bonuses that weren't based at all on company performance. I can't fathom a situation where I'd be able to swing such a thing on a contract. Even more interesting is that these bonuses are specifically for employees in the financial services team- the group that is failing the most these days. These contracts are giving bonuses to employees of a division that generates billions of dollars in losses. No matter the economic conditions and the bailout... this contract was signed in Dec 2007, before the crap fully hit the fan, before bailout money was provided. But when the company was already in trouble. The contract is, specifically, an "employee retention" contract. The intent is to provide incentive for employees to remain with the company for 2008 and 2009 while facing a bleak future. And the contract guarantees big bonuses for failure. The bonuses are as small as $1,000. And seven people received bonuses larger than $3 million. The highest bonus was $6.5 million. For failing. For continuing to fail at a failing company. Edward Liddy has asked those who received bonuses over $100,000 to return half or more of their bonuses and several employees have already offered to return 100% of the money. I heard a news report this morning that Congress is considering a special taxation on bonuses paid out of bailout funds. 90% Can you imagine? Heck- might as well just offer the money back to the company, refuse acceptance of the bonus! Although... retaining 10% of a $6 million bonus would be $600K and I could sure do a lot to make my family comfy with that kind of money. Pay off our house and totally pad retirement and college funds. But I'm betting the person receiving that $6mil would think that $600K is a drop in the bucket. Side note- I'm reading that Liddy and his family and many of his employees have been receiving death threats. And that there is major security in place in the Manhattan office. That is pathetic and sad and crass and... just stop it! Of course, if we were in China, the people being "shamed" by these contracts and bonuses being unveiled would commit suicide under government pressure. So I guess some death threats aren't as bad a deal.


Lynn Freeman said...

Armchair critic/politician here too Liz...and I have one question that permeates throughout all this: why didn't the Executive and the Board of Directors, in place at the time of the granting/executing of the bonus, say to themselves as a governing group of fiscally responsible executives "what are the optics of granting these bonuses...what is the worst that could happen if we don't?". That one simple question that transcends all "legal" contracts, that one question that would have brought the answer "but we have legal contracts in place and we MUST pay them or face lawsuits". Let's examine what might have happened had that question been asked and answered as it should have been. Optics are you don't grant the bonuses - plain and simple, regardless of any legally binding contracts. Worse that can happen? Employees sue for breach of contract. Big deal - how far do you think that's going to get in a court of law when a judge knows the terms of the bailout and the current economic state. I say they're not going to have much sympathy for the employee. What's the other worse than can happen? Employees will quit? Bunch of them already have - great retention bonus. Good for them - glad the economy is so great that they can land another job in good time. I find the whole thing deplorable, greedy and a smite on the Executive and Board who are supposed to govern with high standards of morals and business excellence. Too bad it's just another example of mismanagement and corrupt activity going on every day, everywhere.

Jim and Garret said...

It's so depressing to read/watch the news and learn of layoffs and the economy sink. Then we have to hear about shit like this. THEN it pains me more to hear that our government failed to do it's homework. Can you blame INDIVIDUALS for taking large bonuses they are entitled to? It was a condition of their employment. Get in their shoes for a moment. The shame is in our government.

More in the news about 13 bailed out firms owe in back taxes... millions! Friggin' sick. Again, FAIL by our government.

Flartus said...

Liz, I am in total agreement with you. My own brother works for one of the largest banks out there; one which has taken loads of bailout money. Over half of his income is determined by his annual bonus.

Now, his bonus is performance-based, and he did take a hit on it this past year. But I think that companies have gone too far in making bonuses such a large portion of income. It's fine for a salesman agreeing to work on direct percentage commission every month, but now we have people who have based entire careers on the assumption that they will always make a certain amount from bonuses. And, after 10 years, who's going to feel ok about cutting a loyal employee's income by 75%, putting his whole family at risk?

Yeah, it's a sucky system all around, and individuals and companies making wise long-term decisions wouldn't have created it. But people are greedy--put enough together and you get a bunch of idiots following each others' tails, sniffing for money, until they wander right off a cliff.

Too bad they had to take the rest of us with them.

(On the other hand, anyone who can't "survive" on less than a half-million dollars needs to go do some missionary work in Africa or Central America.)

Liz said...

Flartus- I think they need to do some serious missionary work right here in their own country so that it hits closer to home, so they can't just brush it off as "third world."