Wednesday, March 25, 2009

What's A Bonus Anyway

I heard a commentator on the radio say "people know what a bonus is but they don't know what a credit default is". The commentator was getting at why we all have our shorts tied up over the A.I.G. bonus payout, but I think he is wrong; we (the American people) apparently don't know what a bonus is in the finance industry either.

When I did my first job for Austin, I was paid by the job - I received my payment in two lump sums (one part-way through and one upon completion) based on showing the progress of my work.  I would describe this as "deferred compensation":
  • The amount of payment was predetermined.
  • The work was done significantly before I received the money (this project took over a year of part-time work).
  • The amount of payment was unrelated to the quality of the work.  Either the work was acceptable and I got paid, or it wasn't and I wasn't considered done.
  • We had a binding contract enforcing this agreement - had Austin decided not to pay me for my work, my recourse would have been to sue for my due compensation.
That sounds a lot like the A.I.G. "bonus" situation: money promised earlier to employees based on a contract that is now enforceable.  (I can only assume that if the contract was not enforceable that Liddy would have done the easy thing and not paid the employees in the beginning.)

By comparison I received a traditional "bonus" at the end of a different project - it was simply a one-time extra payment, the amount specified by Austin, after finishing my work, as a way for Austin to reward me financially for work that he was "extra" happy with.  That's what we all know of as a bonus.

Now don't get me wrong, I am in favor of not paying the bonuses.  But...not because I think the employees don't "deserve" them for ruining the economy.

I am for not paying the bonuses because, as a tax payer, I now own A.I.G., and as an owner of a financial institution, I think that:
  1. The compensation of finance employees is way, way too high.  Simply put, I feel that we bought a company with overpaid employees and we should use every technique we can as an owner to reduce salary!  Call me the Frank Lorenzo of financial services!!*
  2. We bought A.I.G. not out of profit motive but to preserve the stability of the financial system. To that end, retaining the legacy employees should not be a goal.  If a side effect of cutting costs is to shed the old employees, I am okay with that.
Of course, there is one very dangerous situation: if employees who know A.I.G.'s "positions" (what derivatives A.I.G. owns/sold/is invested in) quit, can they then try to profit by trading against A.I.G.?  I can only hope that they have some kind of non-compete clause in their contract.  (If not, what on earth was A.I.G.'s management doing?)

* This is why I don't like the idea of congress taxing the bonuses to death - I am in favor of strong ownership by all businesses as a way to protect investor value - including the nationalized ones.  When we the people own a bank, we need to be careful not to let politics run operations, but that doesn't mean we have to be taken as suckers by management.  What drives me nutty about A.I.G.'s bonus payout is that it doesn't strike me as driving a hard bargain.

1 comment:

Anonymous said...

Agreed. This "bonus" blowout is Congress making noise to cover up the fact that nobody has gone up to bat in the people's interest in any of the companies we now hold major stakes in.

Or at least, nobody competent. We just give them money and assume they won't waste it. If past behavior is any gauge, that's the worst assumption possible.

--Yer Bro