Mar 19 2009
FiveThirtyEight: Why AIG Paid the “Bonuses”
FiveThirtyEight: Why AIG Paid the “Bonuses”.
When I’m in over my head in understanding an issue – Nate Silver OFTEN comes to the rescue. This AIG thing has been bugging me, both the “populist” (read: media-induced) rage and the political responses from practically everyone, have been incomprehensible given the facts, and bloggers who seem to say “there’s nothing wrong with the AIG bonuses” seem to be somewhere on another planet. But Nate at fivethirtyeight.com has at last dug up sufficient information to explain the problem and propose a rational way forward.
Key quotes:
The employees in AIG’s Financial Products division (AIGFP) were compensated heavily — perhaps almost exclusively — via incentive-based compensation. That is, the employees got a profit share — a rather generous 30 percent share — of the earnings their division made by trading credit default options (CDOs) and related assets.
In the fourth quarter of 2007, the market for CDOs went completely to hell…
This must have posed something of a problem for the employees in the Financial Products division, since their compensation relied on these trades being profitable. So AIG struck a deal with these employees. It guaranteed them, for 2008 and 2009, the same level of incentive-based compensation that they received in 2007 (except for senior executives, who took a 25 percent haircut), regardless of how the division actually performed. The only requirements were that the employees couldn’t quit and couldn’t be fired for cause (a much stricter standard than the usual conditions of at-will employment.)
That’s the background – but here’s the kicker:
If, as at most hedge funds, the employees are buying in with their own capital and bearing a lot of the downside risk, that is one thing. At a publicly-traded company, however, those employees are taking profits out of the shareholders’ hands. And at a publicly-traded company that happens to be owned by the taxpayers, they’re taking money out of the taxpayers’ hands.
Yeah. When we talk about regulation – it seems appropriate to me to talk about compensation policies as well. Commissioned based pay for publicly-traded or owned companies ought to include structures that force an employee to stay put for at least six months during a downturn, and ought to have some salaried pay that sustains those employees in the meantime. Salaries at reasonable rates, as opposed to six and seven figure “bonuses” for non-performance…
QT
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