AIG
As someone who has spent most of her career in sales, I have a somewhat different view of the AIG bonuses that were paid out with bailout money, though regular readers may recall that in general, I am anti bailout because I was worried early on about the propensity for corruption. Would that I could have been wrong about that. http://javajennifer.com/2008/11/19/temple-of-the-green-apron-who-gets-a-bailout/
One of the most difficult components of running a successful business is designing compensation plans, particularly for a category usually referred to as Highly Compensated Talent. These individuals are likely in executive position as well as sales positions where the total compensation package may include stock options and a bonus structure that is leveraged against a more moderate salary. Though there can be considerable debate on what consitutes a moderate salary, according to some data I culled from www.salary.com, an Executive Vice President can command a salary in the Washington DC area for $180,000 with a total Target Annual Earnings of $450,000. I’m not disputing that $180,000 isn’t a lot of money. It is A LOT of money. But this employee won’t be managed at $180,000, which is 40% of their TAE, they will be managed against the expectations associated with making $450,000 with enormous goals, metrics and milestones to measure performance.
When things are working the way they are supposed to, the company does well and the bonuses are paid out according to the stipulations in the employment contracts. It is however possible to have a subset of employees and executive management is no less employees than the person working in the copy room, who meet or exceed the objectives set forth for them and yet the company fails to perform as a whole.
This has happened to me several times in my career where I outperformed what my division did and conversely when I sent a manager or two of mine to President’s Club while failing to meet my own TAE objectives.
Failure to pay these bonuses would have resulted in litigation and without the bailout money, AIG would not have been solvent the ensuing bankruptcy would have nullified the claims for compensation. Once solvency was attained through the bailout, AIG had little choice but to pay out the bonuses to the people as was stipulated in their contracts.
In Human Resources, there have always been discussions around pay-for-performance. I’m concerned about some discussions that tie compensation to the overall performance of a company whose actions at a high level, I can’t control. If I’m tasked to sell 100 widgets, and I sell 200 widgets, not only do I expect to hit my TAE, but since I over sold against my goal, I expect my accelerators to kick in so that I’m now making an additional 25% of my TAE. That corporately the company that I work for is mis-managing funds shouldn’t mean that I lose the compensation that I’ve earned.
People go into sales and in to executive management positions for several reasons and compensation is certainly a driving factor. I would suggest however that we we pay for it in other ways. In sales, you drive to a compensation plan that sometimes changes quarterly against company goals that are outside the scope of your control and for which are ever increasing. Your goals never go down. Market conditions, competitive pressure, changes in the political climate, wide swings in buying behavior make it very difficult to meet the minimum requirements let alone over achieve and it is these over-acheivements that build a bridge accross the weeks of ramen noodles and peanut butter and jelly.
Or in the case of these AIG executives, the difference between Korbel and Kristal.
Finally, someone who gets it. The outrage on the hill over AIG seemed to be sparked primarily by congress. Let’s examine that for a moment, shall we? Congress seemed to be doing a “CYA” when news of the payouts to AIG leaked – they were seeking a way to absolve themselves from scrutiny and protect their re-elections of the future. So, they feigned outrage at the payouts and demended answers from AIG. The reality is this: Congress made a choice to bail out AIG. We can all debate whether that was a good idea/bad idea, essential, not essential – but at the end of the day, Congress acted as an investor of sorts. They made a decision to place $$ into AIG. In doing so, one would expect that they conduct their due dilligance as an investor might which means getting all AIG documents – business contracts, deals, financial obligations. If Congress had done so, they would know that AIG had legally bindng contracts for compensation that were coming due – and do so each year. AIG had large payouts they have to make due to legally binding deals already in place and this was bound to further break their bank. Congress deciding to invest, decided to make a bad investment – that is essentially what happened. But, many argue that the bad investment is necessary to make versus no investment and economic collapse of an industry. So, for Congress to sit on the hill and act as if they didn’t know: 1. AIG had these binding contracts 2. The investment by congress is a bad investment (even if, perhaps necessary) 3. They would be under fire for this – meaning congress and AIG – - – - for them to act self ritious over this is just typical Congressional politics. Unfortunately, the average american has no clue and is buying Congress’s indignation hook, line, and sinker. You want to be mad at someone over the AIG bonuses – look to congress for not fully disclosing the reality and ramifications of their bad investments. (so much for transparency). Also, look to Barney Frank, in particular. He is the loudest mouth on the hill with the most power in the finance world in congress and he is the primary champion for the legislation encouraging bad risk investments in low income households who everyone knew would default – but which fed financial institutions to HAVE to provide mortages to these families (remember the 90′s…Community Reinvestment Act, anyone?)….and he is also the oh, so intelligent one who is whining the most about AIG. Whining about a bad invest you made when you should have known the outstanding contracts due is really just stupidity. Congress made the investment so they should stand up and take accountability for that investment.