The Bonus Brouhaha
People are uniformly and understandably angered by the news this week that AIG, recipient of tens of billions in federal bailout money, recently paid its executives millions of dollars in bonuses. While I get the reason why so many commentators, citizens, and even members of Congress are outraged, I also think it's important to talk a little bit about how "bonuses" like this often work in the corporate world.
My law firm has shareholders rather than partners, and their compensation is essentially made up of two parts. First, they receive a base salary or "draw," which is paid monthly. The base salary is often only a small fraction of their total compensation. In addition, at the end of each fiscal year, each shareholder receives what is termed a "bonus," which is a percentage both of the billings by that attorney that the law firm has been paid for, and also the billings by other attorneys and staff on matters that the shareholder originated for the firm. I put bonus in quotation marks, because even though it is paid as such, it is pretty obvious that this payment is really compensation for specific work brought into the firm. However, there is a performance component as well, since a partner who does not hit their billable hours target and does not originate work by other attorneys in the firm may not be paid a bonus above their base salary. Under such a system, Some shareholders may have only a $200,000.00 annual draw, but will receive a "bonus" of $ 2million each year. (Yes, I say "only" $200,000.00. If it was 9% of your annual income you'd consider it small too. Let's save the argument about over-compensation of BigLaw attorneys for another time.)
I don't know the specific bonus structure or compensation scheme in use at AIG. But when I first heard about the bonuses paid by Merrill Lynch last year just before they were bought by Bank of America, I figured a similar compensation structure was in use in the financial markets industry. These executives may have contracts with their employers that specify a "bonus" equal to a portion of the deals completed, or assets traded, or some other pre-set percentage qualifier, will be paid at the end of the year as a portion of their total compensation. In the event the person actually hit their pre-specified targets (just as a partner at my firm, say, might bill 2500 hours for the year or originates billings of $5 million), why shouldn't that person be paid that portion of their compensation that they earned? Even if the entire company as a whole did badly, if that person qualified for their lump sum payout through their own performance, I do not think it as much of a problem for them to receive what is inartfully termed to be a "bonus" for that work.
Most of us when we think of bonuses think they are tied to the performance of our company and are paid to show employee appreciation. In many industries and in many companies, that is how it works. Every employee is paid $2000 at Christmastime, or every employee is paid $500 for every year they have worked with the firm. Or, every employee is paid a percentage of a company's profits for the year. Any of those scenarios, were they what happened at AIG, would be much more indefensible given a) the massive amounts paid out (73 employees received bonuses over $1 mil.) and the poor performance by the company requiring it to be bailed out by the feds. But we should be sure that is what actually happened before we grab our torches and pitchforks.
When Obama talked about not having the power to undo contractual arrangements when the first TARP money was paid out, this is what he is talking about. The issue is a little bit more complex than telling the company that you won't bail them out unless they refuse to pay bonuses. A person who has complied with the terms of their contract and, under those terms, is entitled to a set payment would have a valid right to sue AIG for refusing to pay their earned bonus. And does the federal government have the power to require a company to preemptively breach its contracts if it is going to receive federal money? These are slightly more complex questions than the top level outrage and vitriol the media is currently throwing at the issue.
It may also be that the AIG bonuses are indefensible corporate waste and greed, and if that is the case I will grab a pitchfork and join the march. But let's find out a little bit more first.
4 comments:
U understand your point completely. These "bonuses" are actually retention payments, the idea being to keep the FP people around long enough to unravel the problem. I don't understand how they can really deny those bonuses, seeing as they were bargained for.
It's pitchfork time. When the auto companies talked about a bailout, the first thing we heard was "well, the workers will all have to take massive pay cuts."
AIG, meanwhile, wants another $30 billion from the same government that it is suing for $300 million in tax money.
I think Sen. Grassley gave these people too many options in his "resign or kill yourself" speech.
Or maybe some good ol' fashioned bills of attainder instead of pitchforks, eh?
I don't think the proposed legislation violates the bill of attainder clause (it was worded generally enough that it isn't directed to a specific group of people or company, which probably saves its constitutionality), but I do think it's stupid and problematic window-dressing. There's enough of a legal challenge to be made by these bonus recipients that passing the clawback legislation won't really get any of the money back in gov't hands for years (if ever) while it's tied up in litigation. Wasteful and pointless. When Congress is trying to hastily pass legislation just to give the impression it's doing something in response to public outrage, but it is legislation that will almost certainly not accomplish anything, that's when the worst law gets made.
I also don't see why the bonus recipients, who negotiated these retention bonuses as part of their AIG employment contracts, should be punished simply because the company is fighting that $300 million tax bill. It's not like they personally created those dubious tax shelters. The company is far too big and made up of way too many divisions and people to put that litigation decision on every single person in the company.
What I'm really mad about now is not that the bonuses were paid or that the administration apparently is responsible for the language in the bailout that protected pre-existing contractual obligations such as bonuses, but that Obama and his guys aren't doing a better job of defending that decision. Someone needs to explain to the public how these differ from traditional bonuses, why forcing a bailout recipient to anticipatorily repudiate its employment contracts is not only bad policy but possibly illegal, and counsel against the dangers of this populist mob mentality that is running rampant. These people are getting death threats. Senators are suggesting they kill themselves. And as the guy who resigned in the NYT pointed out today, many of them had absolutely nothing to do with the divisions in which the credit default swaps have hurt AIG's bottom line. It's dangerous and ugly and I want no part of it.
Sorry, I won't be grabbing a pitchfork on this one. I wish others in my party would take a deep breath and think about it more too.
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