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March 19, 2009

Should AIG Executives Defer Their Bonuses?

Catherine New
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Note: The remarks of Professors Calomiris and Balachandran were made prior to AIG CEO Edward Liddy’s call yesterday for employees earning more than $100,000 a year to return at least half of their bonuses.

As anger on the Hill mounts over AIG’s use of bailout funds to pay executive bonuses, a debate has grown about how the bonuses fit into the firm’s contractual obligations. Professor Charles Calomiris discussed the matter in an interview with NPR’s Talk of the Nation on March 17 (listen to audio).

“A lot of these bonuses are being used to pay middle-level managers who have this coming as part of their contractual agreements with AIG. From what I understand … much of this money, if not all of it, is something AIG would like to get out of paying, but doesn’t see any way to do so. The remainder [is] the normal bonuses it feels it wants to pay to retain good people,” said Calomiris. “What we are seeing is a backlash of anger and that’s understandable — but anger is not what gets us out of this mess.”

He continued, “There is a strong economic argument for some bonuses, and I can’t judge without knowing more details what is warranted and what is not, but why are we so sure that the AIG CEO is wrong?”

Professor Sudhakar V. Balachandran said in a recent interview that it is not a matter of the company abrogating contracts but rather a situation in which executives could voluntarily defer bonus payment in order to restore public confidence.

“We’re missing a great opportunity here. If you think about the Great Depression, one thing we saw was that a set of business executives really stepped up to the plate to use their skills and their management capabilities to lead their country and their companies back out. They were voluntarily setting aside compensation that they contractually been awarded and entitled to said they would come to work for $1,” said Balachandran.

He continued, “Maybe the folks at AIG didn’t have to do anything that drastic, but wouldn’t it have been a great idea if they had said, ‘We know we are contractually allowed to take this, but why don’t we change this? We are willing to defer what we are entitled to.’ They could do this as an act of faith and take the bonus after the company has turned the corner and is able to pay back the government and taxpayers. Think about the amount of confidence it would restore to voters and taxpayers who feel helpless right now.”

Balachandran added, “This is the time for business to lead, not for business to sit there and say, ‘We’re contractually entitled, so this is what we do.’ We have to restore people’s confidence. The same thinking that got us into this mess isn’t going to get us out.”

Photo credit: Clarke Thomas

Comments

by Osifo Akhuemonkhan | March 19, 2009 at 4:58 PM

The executives at AIG who apparently, are part of the unit that ran the organization to the ground should not defer the bonuses, they should give them back. It has always been my understanding that the intent of "discretionary" bonuses is to reward good performance by employees i.e., results of your work matter! With this in mind, I don't understand how one argues in favor of these AIG execs. Their performance has been pretty disastrous, to put it mildly. Also, if contracts awarding these bonuses were drawn up and signed when the company KNEW that its forecasts were bleak at best, then someone has been disingenuous and acted unethically and should be punished. On the other hand, the government passing legislation that taxes executives receiving bonuses (up to 90%) is tantamount to killing aunts with shotguns. Some employees in TARPed organizations deserve bonuses, not large ones, but reasonable sized rewards if their individual performance merits such. The members of congress are forgetting that not all recipients of TARP collected the money voluntarily. Some were forced to take it. Hence every institution should not be painted with such a broad brush.

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