Claw Back Bonuses, But Change Incentive Structure Too

Finally, someone is going after bankers’ bonuses. Hurray, I say. I’ve been pontificating on getting those bonuses back, so it’s nice to see some confirmation we’re not tilting at windmills.

Last week, as the New York Times reported, New York Attorney General Andrew Cuomo told the American International Group (AIG) board of directors to recover executive bonuses or face legal action. Specifically, they were asked to take back the $5-million cash bonus and $15-million golden parachute given to ex-CEO Martin Sullivan and $34 million in bonuses given to Joseph Cassano, the executive who headed the unit that pushed the company to the brink.

It seems to me the perpetrators of the financial mess shouldn’t be able to keep their billions of dollars in bonuses while taxpayers fork over several hundred billions of dollars to clean up the mess they left behind. We can only hope, in the interests of restoring some semblance of justice, that more bonuses are clawed back across the financial sector. If you want the American public to buy into the bailout (and, indeed, the idea the system works), it helps to show those at the top are sacrificing too.

But there is more to it than sending a message to the public. Taking back the bonuses is also one way to address the moral hazard problem that has plagued U.S. economic policy for decades and contributed to, if not caused, crises like the present. If executives know their reckless behavior is more certain not to be rewarded, they might be less inclined to let it run loose. For more on this, see: Clawback the bankers’ bonuses.

We might also add, it’s about time to tackle the built-in incentives within Corporate America for senior executives to take aggressive risks. Boards hand out bonuses to executives regardless of their performance. There is no downside to being a CEO in the U.S. – they still get nice bonuses and parachutes no matter how much they messed up. Isn’t it odd, for example, Lehman Bros. handed out $5.7 billion in bonuses the year before going under?

Douglas McIntyre of the 24/7 Wall Street blog disagrees with taking back bonuses. He thinks “when an executive gets a bonus, he should be able to keep it, no matter what happened to the company later.” Cuomo is undermining, he says, “the rights of public company boards to use their own judgments on how to handle pay packages for their own senior managers.”

Huh? Aren’t boards of directors supposed to represent the interest of shareholders? What signal are they sending if they let the incompetent and high-rolling executives keep multimillion-dollar bonuses and golden parachutes? Is it: “Hey, executives, it’s OK to be incompetent/riverboat gamblers and decimate shareholder equity?”

Actually, if the AIG board was truly independent, what was it doing sanctioning bonuses unconnected to an executive’s performance? The kind, as McIntyre says, they “should be able to keep, no matter what happened to the company later?” Of course, AIG is not unique in this way: it’s systemic within Corporate America. And now is a good time to put a stop to it.

The directors at AIG appear not to have been true representatives of shareholders. That’s why Cuomo is right to intervene. How can the board at AIG be doing their job? They were still letting the “old boys” club have free rein even after AIG’s near-death experience: the NY Times reported that in the days after receiving a government bailout package of close to $100 billion, AIG staff went on a $442,000 weeklong resort retreat. Another group of AIG officials flew to England on a private jet for a partridge hunt — at an estimated cost of $90,000. “AIG’s belief is that they had the party, and the taxpayers will have the hangover,” Mr. Cuomo said.

Comments

[Mr Gadget:]

Thanks for the thoughts. Over the years I've written to Utility board members to stop basing CEO raises on: "the average of 3/5 other utility CEOs"...to no avail. And to heads of stock funds to not give raises unless the factor for performance is based on at least 6 quarters of increases in bottom lines. But most still use 1/4....shame on the board members who only line their own pockets.
Throw out all board members will sit on more than one board, or are in the same industry, in fact I believe they all should be voted out unless they are more responsive to stockholders needs. Like setting 2 year growth minimums as a start.

2008 Oct 20 09:23 AM

[johnbee:]

These bonuses and benefits were paid out as percentage of sham profits from falsely created values. Its almost certainly criminal, without a doubt criminally negligent, and when has ignorance been an accepted plea for law breaking? These people were in a poosition to know better.
Everyone involved in faking their results (if they do not pay back) should be sued for fraud and jailed and have to give the money back. Auditors should be equally held responsible. Roll on Obama- a good dose of jail for the arrogant rich would be the best first move you make but watch your back- these people make poor losers.

2008 Oct 20 11:01 AM

[DRBRUCE:]

TAKE BACK THE MONEY, AND WHAT DOES THE GOVERNMENT, STATE OR FEDERAL DO WITH THE MONEY?? WHY CAN'T WE GIVE IT BACK TO THE TAX PAYER'S BEING ASKED TO BAIL OUT THE COMPANY. IF YOU PAY TAXES YOU GET A REBATE, IF YOU DONT PAY TAXES, YOU GET 0

2008 Oct 20 05:04 PM