Wednesday, March 18, 2009

Follow-up on Bonuses

A couple follow-up points on yesterday's post on bonuses:

1. I think a lot of the controversy on this story stems from the labeling of these payouts as "bonuses" when, in fact, they more closely represent deferred salary. These are not bonuses being paid out on top of salaries already received, which is the traditional understanding of a bonus. Rather, this is the salary for these employees, many of whom negotiated contracts with their employer whereby they would agree to a salary of $1 in exchange for these bonuses. These contracts were negotiated before the onset of the financial crisis.

2. If the government wanted to prevent these bonuses from being paid, there was a way for them to do that: put the company into bankruptcy. However, for whatever their reasons were, the government decided that this wasn't the way they wanted to go. For the government to complain about it now is unfair. This is their fault much more than AIG's. The government could have either forced AIG into bankruptcy or put restrictions on the money it gave AIG through the bailout, but it didn't. Once it continues to exist as a company, AIG has to continue to run as a company, and a major part of that is honoring employments contracts with your employees. Should they not pay their lease anymore if the rent is astronomical? What about the electric bill?

That being said, there are problems with these bonuses, primarily the dollar figures that are being thrown around. These employees are entitled to get paid, but let's not overdo it. Whether we use the tax system to limit the bonus size or hope that some of these guys adhere to the pleas of Tom Friedman in today's Times, echoed by AIG's CEO Edward Liddy in his testimony today and return some of the money, some of this money should be gotten back. The other issue that is pretty puzzling is calling these "retention bonuses" but awarding some of them to employees that have already left the company. Not sure if anyone has given a good answer to that yet.

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