Monday, March 16, 2009

No More Bogus Bonuses

President Obama has slammed the huge insurance company AIG, which announced that it was planning to pay out $165 million in executive bonuses after having received a total of $170 billion in taxpayer-funded bailout money from the federal government.
Obama said: "All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses. And all they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules." (MSNBC.com)
(You tell 'em, Barack, baby!)
Congressman Barney Frank said that paying bonuses to the people whose mismanagement led to the company's near-collapse is "rewarding incompetence". (Go, Barney!)
And New York State Attorney General Andrew Cuomo has issued subpoenas to obtain the names of AIG employees who are set to receive the bonuses. He says that "his office will investigate whether the employees were involved in the insurance giant’s near-collapse and whether the $165 million in bonus payments are fraudulent under state law". (That a boy, Andrew!)
I understand that AIG is contractually obligated to pay out these bonuses regardless of the financial standing of the company. Failing to do so could subject them to lawsuits, which is the last thing they need right now. What I don't understand is why these executive contracts failed to tie bonus pay to performance in the first place. There is no other industry that awards company leaders regardless of whether they succeed or fail at their jobs. I just hope that this backlash signals the end of this outrageous fleecing of company shareholders (and now, of taxpayers too.)

9 comments:

Ezzie said...

While certainly bonuses would be better if they were tied to a greater combination of short- and long-term performance, this scapegoating of AIG is going to turn into a BIGGER waste of taxpayer money, as countless amounts will be spent on trying to "bring this injustice to light" etc. etc. for the sake of making it look like government is "cracking down". At some point, Cuomo or the White House will take someone to court or the Congress will start a stupid series of hearings that will go nowhere and accomplish nothing, as it will end up being clear that they were supposed to get this money as stipulated. The bigger problem at this point is going to be wasteful government "action", not past actions, however wrong they seem.

Modern Girl said...

I personally don't understand the concepts of "bonuses" myself. If someone deserves more money, I think that should be part of their salary, or wage.

But, I'm a grad student, and other than summer jobs and teaching assistantships, I haven't earned income in the "real world" yet.

David said...

The AIG bonus issue is a big smoke screen to cover up the bigger news about AIG that came out over the weekend.

The money the govt gave to 'save' AIG actually went to their business counterparties, companies like Goldman Sachs, Morgan Stanley, Soc Gen, various hedge funds, foreign entities and some State and Local government agencies.

These beneficiaries should NEVER have received a 'bailout'! They are all large institutions who knew the risks they were taking on when dealing with a counter party.

The fact that their bad judgment was rewarded with a bailout by taxpayers is the bigger disgrace that is being swept under the rug by all the insiders.

SubWife said...

While I see your point, there are problems in tying bonuses to the co's performance. This policy led to lots and lots of creative accounting to make the numbers look better than they actually were so that the management would receive higher bonuses.

I also don't understand that whole idea behind bonuses. While for a salesperson it does make sense to reward for a higher number of sales, management is there to manage, and manage well. If the co wants to pay them more - they should be paid higher salaries.

Baila said...

But how will I live without my 28 million dollar bonus?

SuperRaizy said...

Ezzie-
But if government intervention in this case lays the groundwork for a change in the way that these companies do business, then it might be worth the expense.
Modern Girl-
I think that bonuses are meant to serve as an incentive to do extraordinary work. Unfortunately, they're being promised as part of the pay package, so the incentive gets lost.
David-
I agree.
Subwife-
"creative accounting" is another huge problem that has led to the downfall of these companies.
Baila-
Just skip Pesach shopping this year. That should save you about $28 million.

SubWife said...

Well, my point was that if you take bonuses tied to the company's overall performance from the management compensation package, you cut down tremendously on the incentive to engage in creative accounting practices. The way things are now, it's in management's interest to artificially hike up profits, bury expenses and manipulate price per share, even at the cost of future profits. they get their bonuses and leave, and the stockholders are left with worthless investments.

Garnel Ironheart said...

Here's the problem:
Once you give government money with no strings attached to a company, you can't demand they spend it in a certain way. Obama and his followers have not thought this through at all.
Of course AIG's exec's are going to reward themselves. That's what they do. It's like putting a pit viper into a room and not expecting it to bite someone's ankle.
If Obama had thought this through there would have been plenty of strings attached to the money. But he didn't and now he's throwing a temper tantrum.

Ezzie said...

Ezzie-
But if government intervention in this case lays the groundwork for a change in the way that these companies do business, then it might be worth the expense.


Not if it requires reneging on contractual obligations. That's setting a much worse precedent.