A Bonus on the A.I.G. Bonuses

By Ocean in Current Events, Featured, Our Theory

Since our last article on the AIG bonuses one week ago, the House of Representatives has voted to impose a 90% tax on all bonuses at AIG and 10 other institutions, although you will be hard pressed to find their names mentioned anywhere, since the pitchforks have been aimed towards AIG during this whole ordeal (Goldman Sachs, Citigroup, JP Morgan Chase, Wells Fargo and Bank of America are among them). The senate has not yet passed its version as of the writing of this article.

We stated our opinion on these bonuses in the last article. Briefly, we feel three points should be made: First, bonuses at AIG (and most of Wall Street) are more like what the rest of the country would call “End of Year Compensation”. It isn’t an extra month’s worth that is a nice surprise when it appears once a year, but (often) a contractual obligation that’s an integral part of expected salary. Second, although some top managers are receiving disgustingly large amounts, most of the recipients range from recent graduates to middle management, relying on these bonuses to pay their debts. Third, these bonuses were explicitly guaranteed in the version of TARP signed off by both members of the House and the President’s office.

Keeping this in mind, a 90% tax is akin to rescinding contracts (or 90% of their amount). If the government reserves the right to rescind any contract it has approved because they change their mind, not only will people not want to work for companies receiving any government aid, but it will be very hard to find others who will do business with them. If the government spends $170 Billion ($170,000 Million) on bailing out a company, it is not in its best interest to make that company fail, thereby guaranteeing all that money was wasted.

Some furor was raised also about the fact that AIG is suing the government for taxes paid. This was nothing more than terrible timing and abysmal PR. AIG had to restate its earnings after taxes had been paid. When a company does this, it is standard procedure to sue for taxes overpaid. Of course, it makes great headlines too.

Our recommendations, therefore, are that AIG, and Wall Street in general, while excellent at finding obscure ways of making money, are terrible at Public Relations. These are our recommendations:

First of all, call the bonuses what everyone else in America would call them. End of Year Compensation would work, or even just plain old Compensation. When people hear bonus of $1 Million, they assume that’s less than 1/10 of their salary.

Secondly, instead of holding on to these bonuses and then dishing them out in the millions at the end of the year, put them into a separate account month by month, showing how they reflect work performed. This account can even be under the employee’s name, but will not be accessible until the end of the year (and is forfeited if the employee leaves earlier). Understandably this brings about the issues of liquidity and being committed to certain amounts. The liquidity loss is a small price to pay for avoiding the witch hunt, and though it freezes up cash, it will also be expensed month by month, which avoids a huge nominal amount (such as $165 Million) at the end of the year. Being committed to certain amounts can also be hard (if the first 9 months of a year have decent returns, but a crisis sparks in September, as happened last year). But then again, this means that the monthly amounts will be much fewer starting in September. The other amounts are committed, but also make the employees much more comfortable about having everything forfeited at the last minute.

Third, and somewhat separate, we believe the government (or a private individual) should set up a bank account where all those who received bonuses can deposit their money. Even being voluntary, this would generate goodwill and make Wall Streeters more willing to talks openly about their amounts. This money could then go towards helping U.S. employment and others hard hit by the crisis.