A.I.G. received about $170 Billion from the U.S. government. Out of this, $165 million (slightly less than 1/10th of 1%) will be paid out in bonuses. Seemingly everybody in government, from President Obama down, is up in arms against these bonuses. After all, the tax payers have paid to save these companies and millions of these dollars are going to the executives as bonus payments.
Before jumping on this extremely inviting bandwagon, however, we should look at some details. First of all, what is being called Bonus here it actually more appropriately referred to as “End of year compensation”. For those who have worked in both industries, the bonus structure in AIG (and most of wall street) is very different from an average marketing company in the midwest. While most people work for their salary and are happy receive a month’s worth in bonus as an extra at the end of the year, most of wall street works for their bonus. This is done for several reasons, the main one being it ensures firms that employees will remain at least until bonus time. This also means that bonus amounts are usually contractual and, rather than bonuses in the main street sense, they are more like withholdings of salary until year-end.
Secondly, when tallying up who deserves what, we should keep in mind who’s receiving what. While a small minority are high up executives who are receiving obscene amounts for non-performance (although a few have refused them or paid them back), the majority are recent grads to middle management, expecting their year-end compensation.
Thirdly, as mentioned above, these were contractual. A first version of TARP did away with all bonus payments. This section was scratched, so the bonuses were included. Not only do these bonuses retain talent, but the government knows it cannot take this money back. If it did, people would realize that any company receiving government funds is liable to break its contract, and that company will receive no more business, not to mention it won’t be able to hire anyone.
So what are the government’s options? It could withhold the bonus amounts from the next round of bailout money (which AIG is very likely to request). But of course, this will solve nothing since the managers will keep their bonuses and AIG as a company will merely have less to use, or they will just ask for more again. It could also declare that, as the government, it can decide to rescind the contracts. This brings about the problems mentioned in the paragraph above, not to mention a collapse of the financial system due to arbitrary government takeovers and contract breaching.
The third option is to hold a big witch hunt which will blow off steam (and possibly allow some politicians to score points), but which will achieve nothing tangible. We must assume that most politicians know this, and this is what they are doing.
We at Dumb Agent encourage executives who get paid extravagant bonuses in these hard times to either give the money back or to use it for a common good. We do not, however, believe the government can start breaching contracts because they changed their mind about clauses they agreed to include earlier.
Absolutely, this is one of those situations where nobody is right and everybody loses.
But I am glad you pointed out that most people paid using this money are just your regular employees, some of which may even have made some money in the last year. This situation is cropping up not just in AIG, and is often a variation of the same theme: the money was set aside as ordered by the government or regulation authority.