When is a bonus not a bonus?
When it’s a contractual obligation.
Not having a lot of experience in the corporate world myself (my only stint having been a summer job in college) I always thought the word “bonus” meant something extra, a special payment given for merit. Dummy me.
The argument for the AIG bonuses goes something like this: for government to arbitrarily abrogate these contractually obligated bonuses would undermine employees’ confidence in the sanctity of contracts. What’s more, in the case of AIG, it would antagonize—and perhaps cause the resignation of?—the very people AIG needs to sort out the mess.
Well, perhaps, although I’m not totally convinced.
Edward M. Liddy, the new government-appointed head of AIG who can hardly be accused of taking too much taxpayer money (he’s working for the sum total of a dollar a year), thinks so:
We cannot attract and retain the best and brightest talent to lead and staff [the company] if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.
I certainly wouldn’t call this “arbitrary;” there seems to be just cause. But then again, not all AIG employees are responsible for this mess. In fact, it is a relatively small percentage, and there should be some way to discover who these people are and stop their bonuses, which would make the decision non-arbitrary. After all, although the general idea of the binding contract is vital to the functioning of our society, individual contracts and their terms, as well as how they might be enforced or abrogated, are the subject of lawsuits all the time.
Such lawsuits tend to be expensive, however, and therein lies the rub. Would it cost more to fight these bonuses than to grant them? But would it be worth it, because failure to stop the payments would be a bad example not only because it would violate our “fundamental values,” as President Obama has declared, but also because it would provide a reward for bad behavior?
Unfortunately, that bad behavior has already been rewarded financially. And it probably will continue to be rewarded, since the article also quotes Pearl Meyer, a “compensation consultant” at Steven Hall & Partners, as saying, “The word on the street is that A.I.G. employees are being heavily recruited.”
And she doesn’t mean by the cops. Let’s just hope that those AIG employees who are so heavily sought after are not the same ones who were responsible for the debacle. But I’m wondering: what Wall Street companies are hiring these days?
[ADDENDUM: Here’s a grisly suggestion. But it would be nice to hear some reasonably calibrated admissions of accountability and remorse from those who messed up so grievously.]
It is not the government’s business to decide when a bonus can and should be given. Many of these “bonuses” are also “retention bonuses” which are often given to people who are laid off to stay on for a period of transition (i.e. if you stay on for six months, you get a bonus).
The governement has no legal right to break this contract, and any action it takes to try to change the law to forestall these bonuses is blatantly unconstitutional (no bills of attainder). How much government intervention are we going to permit in the private sector? Next, the government will decide that any company that lays people off can’t pay out bonuses, not just those who received bailout money. It is a slippery slope upon which we should not embark.
neoneocon: But I’m wondering: what Wall Street companies are hiring these days?
The ones that didn’t screw up, of which there are a lot more than the ones that did. This lies at the crux of the reason why many of us questioned the bailouts from the beginning, i.e. when they were still Bush’s bailouts: we didn’t believe that letting the insolvent institutions go into bankruptcy would do deadly damage to the financial markets. That’s not to say that there wouldn’t be a sharp, deep, painful retraction—there would have been—but rather that the insolvent institutions would either regroup or go out of business, with what assets they had being distributed among the rest of the interests.
Supporting this view, IMHO, are those banks that are returning TARP funds because they’re finding the constraints imposed on their business too onerous (i.e. they don’t need the money that badly…) and those states (e.g. South Carolina) that are telling the Obama administration that they can think of better ways to apply their stimulus dollars than the legislation allows (i.e. they don’t need the money that badly, or at least they believe that growing the debt isn’t a good way to spend the money).
Paul Snively: I understand that there are many companies that didn’t screw up, and I would imagine they’re not laying people off.
But actively recruiting and hiring a whole bunch of people from AIG indicates expansion of these companies, which I find very surprising in the current financial climate. Are there that many jobs that have been vacated recently in solvent companies? I find this idea puzzling.
So, for what is essentially chump change in the total package — but “emotional” chump change — we should agree to the proposition that government can, at will, abrogate or “adjust” pay packages that were agreed upon before the government — in its infinite wisdom — “purchased” the company?
This whole issue is a distraction of massive proportions. I know it is because of the palpable “unfairness” of the specific issue, but do we really want to enshrine “fairness” and give government the power to make things fair; to make equality of result a standard?
I was once paid a bonus based on sales. I sold the “product” very well and the cash flow from these sales was the only positive cash flow in the company. The company did plenty of stupid things with the money and eventually went under. But because the company frittered the money I made for it away on other things and went under, does that mean I didn’t deserve the bonus in the first place.
Currently we see congress fiddling about with retroactive laws in order to “tax” or clawback chump change from these people. It stinketh to high heaven. And it stinketh much more than these bonuses.
Another point worth mentioning is that many of these people receiving bonuses were hired to help turn the company around, and the bonuses were offered as part of their package to bring talented people on board to help fix the company.
I agree with vanderleun. If the total sum of the bailout were $165, then the amount of bonus money we are talking about would amount to 16 cents. Our priorities are messed up. We’re letting the government, which is subject to emotional response to political pressure, determine the best practices to run a company. We all know the government can’t run anything well save the military, so why do we expect the decision to strip people of their bonuses, as emotionally satisfying as it may be, to actually help improve the company’s performance?
Put yourself in the shoes of an AIG employee for a moment. You are doing your best to help turn the company around, and you’ve done your job, expecting a bonus in March. Now, the government says it wants it back. How are you going to perform in the next quarter? How burned will you feel, and why would you put in any more effort? What would incentivise you to stay at AIG?
You can’t run a multi-billion dollar corporation on emotions and the political tide of the day.
Is anyone still interested in buying credit default swaps from AIG? I don’t understand why these guys still have a job. I would think that other companies would be loathe to hire these financial wizards.
The only way that the government can vacate these contracts is if they can prove some sort of fraud or illegal transaction, in the form of kickbacks or ignoring warnings about the integrity of their products. I’m sure governments worldwide are looking into it, prodded by the thousands of pension funds, sovereign funds, municipalities, banks, etc, who have lost most of their wealth from the meltdown.
Have you seen the list of AIG counterparties who have recieved taxpayer money? This is the gun held to our heads, why we have to back them in spite of our anger at the greed and carelessness of the AIG financial services section.
Here is the list –
http://www.scribd.com/doc/13299581/AIGs-List-of-Counterparties
This is the downside of the global economy. Transactions fly across borders at a blinding rate, much of it undisclosed and unregulated. Who keeps track of it? Not AIG, not Goldman Sachs, not Deutsche Bank, not our treasury dept or the SEC. It is too big to oversee and too big to fail. And yet what if we can’t keep it from failing?
Apparently AIG has only worked through about a quarter of it’s obligations. And we wonder why the credit markets are frozen.
they dont call them bonuses, the people who dont want them disbursed do…
if the left called them contractual agreements upon hiring and negotiations, they couldnt create the image that the monies were DISCRETIONARY largess that the big guys were jut giving to each other!!!
[almost no one cared that mark fuld lost 400 million… his life savings for working for lehman brothers… and there is no way for a CEO of a huge corporation to know what every department and such is doing.. in fact, CEOs dont even have to know how any process levels below them even work! their job is to move people and structure and make choices… not actually know how an actuarial does the task, or how a doctor does surgery!!!]
they want the people that work for them to be beyong reproach.
hows this… do you want the head of a CEO moving billions of dollars to make only a millino a year? how hard would it be for dubai to pay him 20 million a year to secretly work for them and they will provide a parachute?
these are not BONUSES any more than a loan to a person witout ability to pay it back is a good loan gone bad!!!
we talk about the langage game..
then when we move to the next subject, all the discussion previously goes out the window, and it starts anew.
like watching adhd people get distracted from one useless task to other useless tasks.
if the left plays with language, then is it so odd you dont get what bonuses are, what PE means, and so forth?
meanwhile, pravda is writing as to obama being invalid as president since he is not a citizen.
as i said… its a big mess now happening..
he isnt a citizen… he wouldnt be spending his election money against 40 lawsuits and more, if he had a piece of real paper. (unless he wants othe states to go to war against the US for such ambiguity)
its interesting that the main person they talk about in the article, dr orly taitz, was a russian immigrant..
the articles are not published in the US, but first in pravda, since US papers dont want to address antyhing against obama, and put this in tin hat realm as a defense.
but the place she turns a lot of the proof over to was a town called “moscow” in idaho.
they are crowing that if he IS not elegible, and the points in the dossier are right… then almost all the dmocrats, major newspapers and such are guilty of state treason!!!!
This 130 page dossier contained numerous charges including: a list of 100 addresses for Barack Obama with numerous different social security numbers, issued all over the country and attached to those addresses. It showed the address Obama used in Somerville, Massachusetts, attached to the Social Security number of a man who is 118 years old. It showed evidence of Obama committing perjury, lying under oath. It had his school registration from Indonesia under the name Barry Soetoro, citizen of Indonesia, religion Muslim. There was a page of Obama’s registration to become an attorney and officer of the court in Illinois, where he stated under oath that his name is Barack Hussein Obama and he had no other prior names, which is on record as being untrue. It contained a report from a federal agent, Steven Coffman, stating that there are numerous signs of forgery in his Selective Service Certificate. It contained a letter from a renowned expert, Sandra Line, stating that there are signs of forgery in Obama’s short version Certification of Live Birth, and that the original birth certificate needs to be reviewed in order to ascertain his status. It contained 130 current job positions for Barry Obama, Barack H. Obama and Michelle Obama, which were obtained from Intellius Jobs.com. It stated that none of them were reported on Obama’s tax returns.
the main point is that until he produces that, any country that wants to not agree to what it agreed, doesnt ahve to. any more than if i sign a contract as a gm person for gm and i am not, that gm has to fulfill it.
so internationally, any agreement that he signs, any law, any orders as commander in cheif can be ignored and will be to push the issue.
This lawsuit is important because, the cold hard fact of life is that if Obama is not qualified or eligible to be the President of the United States of America, every action Obama takes is fraudulent. Any Treaty, Executive Order, Agreements, and/or Laws signed by him are not valid and can be rescinded, reneged on or totally ignored by any Nation on Earth, including future American administrations, now and into the distant future. Any trade agreements between Nations and Corporations can be denied or rescinded.
By the very nature of Obama’s citizenship being questioned, it places the liberty of all Americans in jeopardy. Obama himself, can end all lawsuits, quiet all questions, stop all Internet chatter about his citizenship by simply producing a legitimate Birth Certificate. What reason could he have for employing legal firms to obstruct anyone from seeing where he was born?
An ineligible President makes the entire World a very dangerous place and places every Nation in an unprecedented, unstable position in regards to dealing with America.
the dossier is here…
make your own opinions…
just remember that even if he is valid, that doesnt change the potential behavkior of other stat actors.
how long before someone usest hat to oust him?
and how long from that moment, would america not be in a civil race war?
meanwhile, mexicans, sandinistas may just bum rush the border… will we shoot them to stop it?
can any one see the mess converging by the end of the year (word on the street)?
In a humorous vein it’s possible that firms on “the street” are looking to hire these guys to screw things up so they can get “over” bailed out – get their piece of the pie.
When Chris Dodd is the one talking about taxing these bonuses by 95 percent I have to laugh. This is the same guy who got sweetheart loans from Countrywide then promised to produce all the documents months ago and still has not done so.
It would be idiotic for them to try to stop the bonuses anyway. First a lot of these guys apparently don’t live in the US so Dodd and co would not have jurisdiction. Second – they appear to be valid contracts that will be held up in a court of law so not only would the bonuses end up being paid but the taxpayers would then be on the hook for the plaintiff attorney’s fees.
AIG exec wears Che shirt. !!! HA 🙂
http://sayanythingblog.com/entry/aig_executive_caught_wearing_che_guevera_shirt/
This is a fool’s game, getting upset about legally valid contracts requiring $165 million to be paid to AIG employees. This sum is LESS THAN 1% OF THE $170 BILLION paid by the US Treasury to AIG. Let’s keep our eyes on the real money trail:
What happened to the $170 BILLION? Well, about half of it went to Goldman Sachs, Barclay’s Bank, Deutsche Bank, and a large French bank whose name I don’t recall. The other half? Dunno…Ask our wizard regulators and pols.
So in bailing out AIG we bailed out Goldman and several foreign banks. Who worked for Goldman? Why, Henry Paulson; and before him, Robert Rubin. No conflict of interest there, no, none at all.
Now come the wizard Democrats, hoping to tax 91% of the bonus moneys away from the bonusees.
Who will they come for next?
The country is doomed without a massive mobilization of serious opposition.
Would it cost more to fight these bonuses than to grant them?
Yes. I commented on this idea in the previous AIG post.
In a nutshell:
If the contracts are valid (and they’re likely boilerplate standard contracts and thus have been scrutinized by the courts in previous cases and upheld) and the terms of the contract have been fullfilled by the employee, then no court will strike them down. That way lies madness, and the courts will not willingly go down that path.
So, now having litigated and lost, AIG will have to pay the following:
1. the promised bonuses
2. depending on the length of litigation, interest on the bonuses
3. AIG’s lawyers will get paid
4. the employees’ lawyers
5. the court costs
6. the costs of discover for both parties
Unless the suit is filed and heard in a rapid fashion, this will be a lot more expensive than $165 million.
I don’t see this as rewarding bad behaviour. In fact, it is the opposite: they where offered an opportunity to perform at a high level and if they met their goals, to gain additional compensation. Apparently, they’ve met their goals to a tune of $165 million.
Back to that “road to madness” remark: our business structures are held together by contracts and contract law. If the government – be it Congress, the Executive, or the Courts – abrogates a valid, legal contract then no contract is worth the paper it is written on.
Let that sink in for a moment.
Expecting your retirement to get paid? Social Security? Medicare/Medicaid? as a renter, I could see my apartment rented out from under me. Conversely, I could seize the property and change the locks.
Actually, we are seeing Obama do something very similar with his whole notion of allowing wounded vets to pay for their medical care. A careless observer might wonder if Mr. President is purposely attacking the “social contract”.
neoneocon: But actively recruiting and hiring a whole bunch of people from AIG indicates expansion of these companies, which I find very surprising in the current financial climate. Are there that many jobs that have been vacated recently in solvent companies? I find this idea puzzling.
Let’s suppose you have to pay these new hires $1.5M/year plus bonuses for two years until the economy recovers. Let’s further suppose that many of these hires were not directly responsible for the trades that resulted in AIG’s difficulties. Were I in a hiring position at one of the competing firms, this calculation would be a no-brainer.
I recommend Tigerhawk’s sane posting on the issue at
http://tigerhawk.blogspot.com/2009/03/few-thoughts-and-questions-on-bailouts.html
FALLOUT GROWS: Those who voted for the stimulus supported the clause to protect the AIG’s bonuses. Obama’s Own Stimulus Bill Protects the AIG Bonuses He Now Condemns –
http://www.butasforme.com/2009/03/17/obamas-stimulus-bill-explicitly-grants-aig-the-legal-right-to-hand-out-bonuses/
I was against the bonuses, however after listening to our betters talk today I’ve flipped 180 degrees.
Oh, that. I had hoped your ‘grisly suggestion’ had something to do with Soylent Green.
My husband doesn’t play with THESE big dogs, but a significant portion of his compensation is in two forms besides salary: stock and options (at present worth pretty much nothing), and a once-a-year bonus. The bonus has a “target” of some percentage or other of his salary; for good performance he hits that target. For excellent performance, he exceeds it. If he were to perform poorly, but either still be needed to fulfill his function while a search went on to replace him or, say, have made one big error and they want to penalize him for the error but not throw him away, he’d receive a lesser percentage, down to zero (though getting a zero-percent bonus is tantamount to “Find a new job, bub; you’re through here,” without having to pay severance).
I’m a little ashamed to say I’m not following the AIG thing too closely. But I know that abrogating contracts, either those of the employees or those of the counterparties, when practically the only thing the US has going for it at present is that the whole world trusts us to observe contract law strictly and not go nationalizing things or deciding who does and doesn’t get paid regardless of contractual obligations, is TROUBLE. As with monkeying around with climate (for instance), we ought to approach such an idea with fear and trembling, no matter how unfair or off-kilter it seems.
P.S. Unwinding things – hedges, credit default swaps – is, I understand, as arcane an activity as setting them up in the first place: first you have to understand how to do it, and then, one hopes, you’re good at it, such that the company (or in this case the taxpayers, I guess) doesn’t take a bath. The husband is responsible for his company’s hedging program (among other things), and has been educating the board about hedging and the company’s hedges for going on five years now, and they still don’t get it.
(It goes without saying that *I* don’t get it.)
So it’s perhaps not specious to argue that these particular people are in fact necessary to unwind the swaps.
I’m not particularly emotional about this bonus issue, but I think you hit the nail on the head, Neo, with: “when it’s a contractual obligation.” These bonuses were not performance bonuses — they were negotiated to be *equal to the 2007 bonuses no matter what happened to the company.* Furthermore, they were given out primarily to exactly those employees who were responsible for the disaster at AIG in the first place. These were not bonuses given equally out over the whole company — they were focused primarily on the unit that is responsible for the mess we’re in.
If AIG had not been rescued by the government, they would have gone bankrupt, and the bonuses would not have been paid. The only reason the bonuses are being paid is AIG was rescued by the government.
I agree that abrogating the contracts would be a bad precedent, but the current proposal to simply tax the bonuses away I think is perfectly fine. It’s legal, it’s within the rights of Congress, and it looks like it is going to happen, since outrage over this spans both right and left.
Excellent discussion on whether those bonuses can be renegotiated after all:
http://roomfordebate.blogs.nytimes.com/2009/03/17/when-bonus-contracts-can-be-broken/
Interestingly, it may be that AIG has shot itself in the foot by insisting on paying the bonuses without renegotiating them, because the mood in Congress appears to be to tax them at or very near 100%. If AIG had renegotiated the bonuses they may well have gotten away with paying the significantly lower bonuses — but now, the executives in question may well get no bonuses at all.
Admittedly this is simplistic so no letter bombs please.
AIG is an insurance company. It got hit by unforeseen events. If seven major hurricanes make landfall in the US this year more than one major insurance company would go broke. And no, they can’t sue the weatherman.
Worse news. Chuck Schumer is talking in (er) inimitable way about placing a retroactive 100% income tax on those bonuses. If the government starts using tax law in this way NOTHING is safe. I don’t want to guess what would happen if it got before SCOTUS, but along the way it would probably be upheld at least six times.
I wouldn’t buy a used pogo stick from Chuck Schumer. Would you?
Mitsu,
Let’s tax the stimulus plan 100% so that the payout is recovered 100%.
Lots of good sensible comments here. The populist outrage; particularly by Frank, Dodd, and the One; seems theatrical and contrived.
A lot of things in trying to reliquify the financial system are beyond the ken of the average person. I’ve spent a lot of time on it and I don’t understand nearly as much as I’d like to.
I agree with Roy Lofquist. These companies were not trying to break the law or break the bank. They all were dealing in complex financial instruments that only a few “quants’ seem to understand. Most people don’t get the mathematics that goes into creating derivatives. Fortunately or unfortunately, they worked very well for a while. What few saw was the unintended consequences of the housing bubble bursting with such a vicious pop. IMO, most of these companies top executives were blindsided by this just as they would be by a bunch of natural disasters as Roy points out.
I also agree with njcommuter. If the Congress can pass a law punitively taxing a few individuals because they are playing to public opinion and outrage about these bonuses, none of us are safe.
We are starting to get a French Revolution type fever in this country. When a sober, conservative Senator, Chuck Grassley, can suggest the receivers of bonuses commit hari kari, it seems to me things are getting way too heated.
Thanks to Vanderleun for the Tiger Hawk link. I think he makes a lot of sense.
I left a comment at the earlier AIG thread about the fact that FASB is considering lifting the mark to market rule for illiquid securities held by financial companies. Thought I would repeat it here. They are considering allowing them to value the securities according to the income they are paying and not according to some phantom market value. FASB will make a final ruling on April 2nd. IMO this could inject some confidence and liquidity into the system that might allow the orderly working out of these securities. If so, we may have seen a market bottom and the beginning of a recovery. Let us hope.
Dunno if anyone’s mentioned it yet, but the guy who pushed for legal protections for executive bonuses in the $$$ bailout was …. CHRIS DODD!!! (see link at Instapundit.)
This creep’s sticky fingers are Everywhere. Can’t we impeach this clown?
Ewww.
Interesting. I wonder how the people talking about “abrogating” (i.e. breaching) these contracts would feel about “abrogating” union contracts.
When I commented last night, I hadn’t heard about this proposal to tax THESE PARTICULAR individuals nearly 100%. Holy cow. This is just as scary as the idea of abrogating the contracts willy-nilly.
njcommuter, thank you so much for this: “If the government starts using tax law in this way NOTHING is safe.” These rich people will be made to suffer under the pretext of having “caused this mess”; what about the next rich people, who just got more than their fair share?
The government is essentially the controlling interest in AIG now, right? If the government – with, God help us, our own consent – believes that it has the right either to break contracts at will or to target individuals with taxes specifically on them, why not just FIRE the people they believe shouldn’t receive these bonuses? Hire in some new people to “clean up the mess,” and pay them the bonuses?
Because it’s not about the bonuses. It’s about the rich. French Revolution, indeed.
Jim – PRS: I had the same thought! Initially it gave me hope that enough ordinary Americans would eventually (not too late?) realize that the government’s playing fast and loose (I am SO full of cliches these past few days) with contracts could provide precedent for lots of other people’s doing the same: that interest rate in your mortgage contract? Maybe the mortgagor decides next year they’d like another point on that. The contractor putting in a new patio for you? Maybe s/he needs more time to finish than the original contract allows, but doesn’t want to forfeit whatever on-time payment is in it.
And I went to the union contracts: maybe union people will realize that government’s ignoring these contracts logically would allow government, or large companies that can get government’s imprimatur, to ignore union contracts. Then I sighed, realizing how slim the chances of that might be.
I’m still utterly horrified at multiple different elected officials demanding these folks give back their pay, or it will be taken from them– oh, sorry, “taxed at 100%.”
I’m unlikely to ever make money in the style those folks do, but if the gov’t crosses the line of openly robbing targets they think are safe by taxation….
Jim…”I wonder how the people talking about “abrogating” (i.e. breaching) these contracts would feel about “abrogating” union contracts.”
Union contracts cannot be abrogated except:
a)by consent of the union, which usually will require the consent of the majority of its members
b)as part of a bankruptcy proceeding
If AIG, or at least the derivatives component of it, had been allowed to go into bankruptcy instead of being rescued, then these bonus payments would have been the business of a bankruptcy court and would have had priority far below that of many other payments.
but the current proposal to simply tax the bonuses away I think is perfectly fine
Not exactly. See: US Constition, Section 9, Clause 3:
No Bill of Attainder or ex post facto Law shall be passed.
You won’t see a finer example of ex post facto than Congress passing tax law in a retroactive manner to “deal” with this.
Ditto what IRADA said. Taxes are for raising revenue. To instigate or to increase a tax just to stick it to a certain targeted class, is highly objectionable, although not without precedent. To do the same thing to stick it to a particular set of persons in the aftermath of a specific event, is reprehensible, a serious fracture of public trust, and should be impeachable.
There is nothing — absolutely nothing — separating the right these bonus recipients have to the money they earned, from the right ordinary folks like you & me have to every little stick & shred of property we think we have. There is no reason to take it away from them, or to interfere with their access to it, that has anything to do with accountability, integrity, honor, et al…it’s all just plain politics. Anyone who thinks a right to property should be lost, or even scratched & dinged up a little bit, over politics, may your chains rest lightly upon you and may posterity forget you were my countrymen.