Tuesday, 17 March 2009

The AIG Bonus affair

The newslines are awash with reports of AIG paying out bonuses of $165 m, after getting a bailout of $ 170 bn from the US government to stay afloat. Normally, I am of the view that too much noise is being made on executive pay, stemming largely from jealousy, and it doesn't deserve all the attention its getting. But in this case, there is every cause for outrage.

The facts are as follows. These bonuses are retention money's guaranteed to the key executives in AIG's Financial Products Division. For those unfamiliar with the situation, this is the Division that brought AIG to its knees with huge positions built on credit default swaps. When the shit hit the roof, AIG needed these executives to continue with the company to recover whatever could be recovered. They were the only people who probably understood what they did. Hence the retention bonuses.

Ed Libby, the Chairman of AIG has laid out why the bonuses had to be paid in his letter to Tim Geithner, the US Treasury Secretary. In plain English his position is as follows

  • He hates these bonuses as well
  • He is not getting any
  • He and the top 25 executives have committed to draw a salary of $1 for the year
  • The company needs these guys in the Financial Products Division
  • The bonuses are contractually committed
  • AIG will get sued if it doesn't pay and will then have to pay twice the amount
  • Hence regretfully it has to be paid, much as everybody dislikes it

AIG is probably legally correct, but wrong in every other aspect in the way its handling this situation. It will get egg on its face. The US government is not going to sit idly and watch this go by, law or not.

With the wonderful advantage of throwing a stone from the outside, my humble suggestion of an alternative way of dealing with the situation is as follows

  • Tell the guys in Financial Products Division, it would be complete suicide to pay these amounts, contractual or not
  • Tell them , the company values their contribution and will pay 2 times this amount, after the bailout situation has been reversed ; maybe 2 or 3 years from now. Remind them that if the company had gone into Chapter 11, they wouldn't have got anything at all; so this is better than nothing.
  • Ask these guys if they would like to voluntarily agree to this. Maybe 50% will and 50% won't.
  • Tell those that won't, that the bonuses are cancelled and they can do as they wish.
  • Tell them that they would publish their names in the press and that they are welcome to sue. Tell them that they may win, but no serious company would employ them after that.

Public opinion, at the end, is more powerful than the law. After all even the most powerful men on earth are scared of public opinion turning against them.

And AIG may find that its smart employees aren't stupid enough to take on public anger for a million or two in bonuses.

PS - After I wrote this post, I came across an article in the New York Times with the opposite point of view. To read this, click here


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