Bonus Payments Need A New Name
by sarabeth at 6:00 am on March 18th, 2009 in Economy, Podium SpinNobody has ever pretended that the $165 million AIG paid out in bonuses to employees of their London unit — the unit which caused all the losses which required the spectacular and ongoing bailout of the company — constitute a conventional performance bonus.
What they did pretend — and this has been a common pretense among bailed out firms — is that it is a retention bonus. Thus, CEO Edward Liddy’s stirring defense of the payments:
We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.
Of course, we can’t. However, it appears that we can’t retain the best and the brightest talent even with the so-called retention payments:
… New York Attorney General Andrew Cuomo confirmed in a letter to Congress that this year, after receiving federal bailout money, AIG paid 73 employees bonuses of more than $1 million each.
Cuomo also wrote that 11 of the employees no longer work for the company. The largest bonus paid was $6.4 million; seven other people also received more than $4 million each.
It’s not clear whether they took their millions and left, or whether they left but still got their millions. What is clear is that the retention argument doesn’t exactly fly.
Perhaps, we need a national contest to come up with the right phrase to describe these payments? If Treasury Secretary Timothy Geithner — who has now officially gone from being “uniquely qualified” to being hapless (as per Time, Huffington Post and Salon) — had any sense he would announce a first prize of say $200,000. First of all, such a contest would be cathartic for the millions of Americans who are consumed by outrage. It would also, no doubt, be stimulative, assuming that the winner is likely to be someone who was put out of work by the depressing economic legacy of George Bush. Those are the people who would have the proper depth of feeling, as well as “world enough and time” to do justice to that depth of feeling.
Till the contest comes along, and the winner is announced, though, I am partial to a phrase that Jon Stewart used to be fond of using. It has the advantage of being phonetically related to the word bonus, and also describing what the recipients of the money did to AIG, and, therefore, to the entire global financial system, and, therefore, to the American taxpayer.
This $165 million is bone-ass money. As in, we’re paying them for “royally boning us in the ass.”
*** Update, 6:57 a.m. ***
The NYT provides a fuller picture of bone-ass payments to the departed (the very dearly departed, actually):
The bonuses that the American International Group awarded last week were paid to 418 employees and included $33.6 million for 52 people who have left the failed insurance conglomerate, according to the office of the New York attorney general.
So not only did 12.5% of those who got the bone-ass money leave, but these guys got 20% of the money. In other words, the guys who left got a much higher average bonus than the guys who stayed: roughly $650,000 versus $400,000 $360,000. Retention bonus, indeed!
libra wrote:
[...] the guys who left got a much higher average bonus than the guys who stayed: roughly $650,000 versus $400,000. Retention bonus, indeed!
Those weren’t “retention” bonuses; those were “retentive” ones. As in: “anal”. To go with the “bone-ass”
Posted 18 Mar 2009 at 4:07 pm ¶
Rick B wrote:
OK. Let’s assume the individuals contracted to work out the complex and very delicate bundles of derivative contracts until they were completed, and the employment contract essentially covered retention of the employee until the contracts were completed. Does that not describe a “Retention Bonus?”
That’s what I heard Liddy testify today. The problem was that the bundles of derivatives were unique, highly complex sets of contract that required daily monitoring and entry into the market to buy and sell additional derivatives to keep the package intact. If anything failed, then the overall bundle goes into (very expensive) default, triggering hefty penalties and losing the full value of the contracts.
Each contract bundle is unique. A new person could not come in to replace one of the managers and successfully monitor and manage those contracts from day one, and missing one day during the life of the contract could cause it to fail into default and become a total loss. Manager retention until the completion of the contract avoids massive loss and in fact probably permitted a profit large enough to easily cover the bonus contracted for.
The Republicans are not going to buy that, because it is too complicated for the public to believe. They have “An Issue” for their typical populist smear jobs, and nothing anyone says is going to convince them. They will ride the issue all the way to the voting booth. But if you speak “Finance”, Liddy explained all that today in his testimony.
The Washington media sees this as both a way to knock Obama and to boost Republicans. They also see this as the new “Terry Shiavo – Dead White Girl – OJ Simpson” scandal that THEY can ride to the advertisement sales.
Besides, the media reporters are too ignorant to determine what I just wrote, and even if they did, it fails the “If it bleeds it Leads” journalism test. There is no future in a reporter reporting what Liddy really said as though Liddy were not lying or just wrong.
I’m not 100% convinced, but frankly, Liddy offered a really coherent explanation, one that apparently convinced Larry Summers and Timothy Geithner.
Posted 18 Mar 2009 at 4:27 pm ¶
Johnny Canuck wrote:
I also listened to the hearings and agree with Rick B’s assessment. The other point that appalled me: LIddy answered a question; subsequently other Congressmen would ask the same question, including the same incorrect information. Must have been at least 8 or ten times that LIddy had to tell them the total amount AIG owes the US -less than $100 billion, not $170 billion; that the people being paid the bonuses were not the people who created the problem; that the credit swap problem dates back to 2005 and AIG stopped doing new ones in 2006- That there are 3 parts to the division and that the people they were paying the retention bonuses to were in the good divisions. As far as I could tell most of the Congressmen were incapable of understanding the answers,
Posted 18 Mar 2009 at 5:39 pm ¶
Mel Brender wrote:
Not having listened to Liddy’s testimony I will not comment on that, but Rick B’s explanation is clearly false on its face. He doesn’t say how long the typical contract is, but certainly it is more than mere weeks.
No company would sensibly enter into obligations under which the loss of a single employee would trigger likely and expensive default. People get hit by buses, become fatally ill, and so forth. The risk would be too great.
Just as clear is that the profits from the contracts could not have been, on average, large enough to cover the bonuses, as Rick B supposes, since in that case the AIG division would have been profitable, and not needed the enormous bailout in the first place.
Posted 18 Mar 2009 at 7:11 pm ¶
sarabeth wrote:
Re #2: I was busy with other stuff today, so I didn’t watch Liddy’s testimony. And I haven’t had a chance to read about it in detail yet.
But nothing I have seen so far suggests that Liddy testified that the people who got bonuses even though they had left had finished unwinding their contracts.
Here’s what you seem to be arguing: we needed to pay these guys retention bonuses after they had finished unwinding their contracts and left.
The conventional understanding of the term “retention bonus” is: a bonus you pay employees to retain them for the future. A bonus you pay after they have left cannot be called a retention bonus. And no one is calling these payments performance bonuses. And there doesn’t seem to be a third category of bonuses.
Posted 18 Mar 2009 at 7:24 pm ¶
sarabeth wrote:
Would love to see Rick B respond to Mel Brender’s second point.
Posted 18 Mar 2009 at 7:27 pm ¶
Johnny Canuck wrote:
Mel Brender. You don’t understand. The object is to wind up the division. The portfolio being managed has already been reduced from $2.7 trillion to $1.6 trillion- absorbing a loss in 2008 of $30billion. This isn’t an issue of performance bonuses and profits. It is a question of -if you will stay around to help wind up this division it is worth it to us to pay you big bucks
Apparently the bad stuff is now almost all gone and the rest will be wound up over 2-3 years at a probable cost of (only) a couple more billion.
The people who made the bad contracts did so in 2005 /2006. The negative effect apparent only in 2008.
It is not any one person, but dozens of highly knowledgable guys – lose a few, not a big problem lose a lot and US taxpayer, who might otherwise escape from AIG by 2012 at no cost
could screw it up.
It is like asking if there is anyone on board who knows how to fly a plane after the pilot seems to have got through some rough turbulence. Maybe someone else can, but do you really want to take the risk? Or basketball team has a really bad first period; don’t lose anymore ground during the second period. At halftime irate fans want to recruit a new team to finish the game.
Posted 18 Mar 2009 at 7:32 pm ¶
Johnny Canuck wrote:
“But nothing I have seen so far suggests that Liddy testified that the people who got bonuses even though they had left had finished unwinding their contracts.”
Liddy testified repeatedly that although he wasn’t there when employment contracts entered into, and wouldn’t have structured them the same way- they were to people being told to wind up their “book”. You get the bonus when you have finished winding up your book, Some had finished their assignments as early as Sept/ October and left; payment made March 15.
Posted 18 Mar 2009 at 7:39 pm ¶
Johnny Canuck wrote:
“The conventional understanding of the term “retention bonus” is: a bonus you pay employees to retain them for the future. ”
As I understood Liddy, the commitment to pay was made early last year. It was made to retain them but payable when they had completed their task.
Posted 18 Mar 2009 at 7:43 pm ¶
jax wrote:
Breaking News: Dodd Says loophole that protects AIG Bonuses added per request of the Obama administration. The video is about a fifth of the way down.
http://www.butasforme.com/2009/03/17/obamas-stimulus-bill-explicitly-grants-aig-the-legal-right-to-hand-out-bonuses/
Obama should take full and direct responsibility for this mess.
Posted 18 Mar 2009 at 10:13 pm ¶
James Wimberley wrote:
In keeping with the piratical nature of AIG’s employees, their bonuses should be known as hornswoggles.
Posted 19 Mar 2009 at 3:01 am ¶
James Wimberley wrote:
In keeping with the piratical nature of AIG’s employees, their bonuses should be known as hornswoggles.
Posted 19 Mar 2009 at 3:02 am ¶
Tom wrote:
How bout if we refer to them as the “mrs. O’leary’s cow bonuses” since paying these imbeciles to stick around is essentially equivalent to paying the the cow to stay in Chicago after the fire it started?
Posted 19 Mar 2009 at 6:18 am ¶
Mary OK wrote:
I agree with Johnny Canuck’s response to Mel Bender and add a few points:
AIG is trying to wind down this division. That means that people are out of jobs when the wind down is finished. I have seen insurance regualtors pay “stay” bonuses employees to stay during the wind down period. Why would they do this? Because it isn’t good for one’s career to hang around a defunct business unit. If they don’t pay them to stay and to work quickly, in accordance with a schedule, the employees will come in every day and look for a job. And leave when they find the best career opportunity. Usually a wind down takes about 12 to 18 months for the production side. In a mess like this, there are probaby contracts that were never written. Negotiation correspondence that is in some one’s personal email. Accounting transactions that are backlogged. Likely some of the customers never paid their premium and you could technically cancel there insurance contract and avoid some losses. All of this work goes a lot faster if you have existing employees working on it and pay them to stay and work quickly. There is no point trying to hire people to do a short term job, no matter how well qualified. Also, you have at least a pretty good chance of hiring rummies that created trouble at other failed Wall Street firms. THere is no guarantee that you are going to hire good people that are better than people you already have evaluated and who already know the procedures in your company and know where to find things that aren’t obvious.
This is further complicated by the fact that the bonuses were already promised on a date certain – March 15th. What would many of the people who still work there do if they found out that those who lived up to the bargain did not get their check? Leave en masse on the 16th and/or start looking for another job on company time.
The only thing that I wish someone had asked Liddy was why they paid bonuses to people who are still there – and presumably had not yet finished their wind down work? Perhaps there were mid term benchmarks that were met or perhaps some other reason. I would like to understand that better.
In any event, I live in Chicago and a neighbor of mine, a Senior Vice President at AIG left recently to join a competitor. No one senior is going to want to stay there, particulary after watching congressmen try to bully your CEO into reciting names of highly paid people on the TV. The best people will find alternatives and they will do it while you are paying them.
For all intents and purposes this company is already in receivership. They just want to hold it together, isolate the problem business, and sell the rest. It is going to be difficult to sell the company without experienced people there to assist with the due dilligence process and to run it. Service industries are all about the people. There is nothing there if the people are gone and they take business with them. The people trying to buy the company know that.
Posted 19 Mar 2009 at 1:09 pm ¶
dan wrote:
boo-nuses
execu-graft
corp-stortion
Distension payments
Libby distributions
TARP-fare
this is fun! too bad it’s pay-to-play!
Posted 19 Mar 2009 at 2:37 pm ¶
sarabeth wrote:
Just what AIG needed most at this time, evidence that they still haven’t told the whole truth about the bone-ass payments:
Posted 21 Mar 2009 at 8:00 am ¶
sarabeth wrote:
AIG is responding that the Connecticut attorney general, Richard Blumenthal, is just seriously confused:
Posted 21 Mar 2009 at 4:38 pm ¶
cristian wrote:
Here is the other side of the story, as published in today’s NYT: http://www.nytimes.com/2009/03/25/opinion/25desantis.html
Posted 25 Mar 2009 at 5:43 am ¶