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AIG paid 22 people over $2MM each as retention bonuses, even though they worked in the Financial Products Division that basically sets the standard for bad investing. If you want a key employee to stay, your pay is in exchange for future services. If they have the option to leave right after the bonus, this is not a retention bonus, but rather, a bonus for performance, such as a percent of commissions or revenues generated.

Thus, it makes zero sense to pay someone cash as a retention bonus. You should pay them in restricted stock, or call it something else. As part of a unit that basically bankrupted the company, I do not see any reason why one should pay a premium for these people, because when a unit like that fails so massively, the option to cherry pick trades that made money and lobby for a piece of those profits is worthless. The Financial Products group is so worthless, such tendentious pleading should fall on deaf ears. Further, paying them cash makes no sense for shareholders. It seems like an "agency problem" is at work.

This just highlights the ability of corporate insiders to appropriate value from shareholders. I wouldn't give them a special tax, as a government agent I would just liquidate the company, unless they can pay back my investment immediately. The franchise value should go to zero, and debt holders may bear some losses. If this happens, perhaps insiders will not try this as much in the future, because capital providers would care about such things. In this market there are a lot of smart people, knowledgeable about derivatives and financial products, looking for work. The notional amounts are scary, but it is straightforward, and the current management is clearly not operating in 'good faith', and once you know that, you need to excise them asap. Breaking promises is warranted because basically this company is bankrupt, and employees are unsecured creditors. In the same way I think Ford (F) and GM need to abrogate their old UAW contracts, AIG should abrogate million dollar cash retention bonuses. Both are not in the capital provider's best interest, and as these people need capital, it should present such firms with a choice: adjust your contracts or get in line with everyone else to pick over the company's assets.

Source: AIG: Why Pay Retention Bonuses to People Who Shouldn't Be Retained?