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

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.

Comments

[Kint:]

Good commentary.

Mar 18 04:21 PM

[Daniel Moser:]

After watching most of the testimony by the CEO of AIG, it has become quite clear that pretty much everyone misunderstood what the retention bonuses were for. This particular article is no different and only spreads the confusion and wrong ideas to people interested.

The retention bonuses, as argued by the CEO, were designed to prevent portfolio managers/traders from walking out before unwinding their trading book (apprx. 2.5+ Trillion when the unwinding began and sits at apprx. 1.5 Trillion). These retention bonuses should be thought of as a simple final paycheck to a demolition crew that uses screw drivers and wrenches to deconstruct a very complicated building rather than dynamite and wrecking balls.

While I agree with much of the tone with respect to many upper level managers and their superb talent for fattening up their own wallets while shareholders suffer, the underlying facts are dead wrong.

During the testimony it seemed like the CEO of AIG kept having to repeat himself to congress (who collectively, apparently, had no better understanding of the purpose of these retention contracts than this author), on exactly why it was so important to carefully unwind the AIG FP portfolio rather than just literally fire sale everything at once to have it over with in a single week.

So, hopefully everyone will now have a better idea that the retention bonuses were paid for services rendered in the unwinding of the business in order to prevent a walk at during a dire time of need.

Perhaps an even better analogy would be paying a bonus for a bomb specialists to defuse a bomb, he/she at one point helped design to prevent, rather than have him/her walk off at 10 seconds to detenation.

If people believe mark to market is causing severe choas for financial institutions now, imagine what dumping 2.5+ Trillion worth of derivative securities onto the market at once. It might have easily purged the financial system entirely, thereby taking down every single financial institution at once. My guess is that most reasonable people would consider that scenario dire for everyone in the U.S. and very likely the rest of the developed nations.

Mar 18 04:59 PM

[frustration:]

When are we going to start talking about the fradulent / illegal business practices that were taking palce in that department? Why does everyone seem to want to tip toe around that? It seems that some of the policies they were writing could have never been covered. I know in small business that would be illegal. Isn't that the real case here? I don't pretend to have the answers, I am just trying to understand why the logical questions that come to my mind are not being discussed by others... Please, school me if I am way off base here. I just want to understand.

Mar 18 08:23 PM

[Mad Hedge F...:]

Hang them from the highest tree. I’m glad that I’m not counting on an AIG bonus check to clear the bank. CNBC has turned into the AIG channel. I can only imagine how that annual review conversation went down. “The good news is that your bonus is $5 million. The bad news is that you will have to spend $25 million in legal fees defending it”. Thank goodness for small favors. What hath Obama wrought?

Mar 18 08:46 PM

[jeffc:]

Why is their so much media coverage on the the 165 million paid to AIG bonuses when the Fed has just unilaterally decided to print 1.2Trillion USD on top of the previously issued debt. The AIG bonus issue strikes me as a rather convenient distraction to keep us - the sheeple (and the media) unaware or ignorant of the 1.2 Trillion that the Fed is now spending!

Mar 18 09:47 PM

[thatguy57z:]

What we have here is rape of the taxpayer in broad day light and with the help of the government, what needs to be done is everything be taken from the ones that got the bones and let them show that they earned it.
Because from my mind is they where going down,so at that point nothing on paper matter its no good ass wipe paper, then the taxpayer steps up your on are terms weather it was on paper or not you answer to the taxpayers first.

Now the government need seize everything they got the money and in a court of law at there own expense and let twelve people decide if they earned it

Mar 19 01:35 AM

[the_lazy_ob...:]

I say: PUBLISH the names of those who did NOT return the bonuses. And for those who grabbed the bonuses and LEFT the company (when the bonuses were supposed to be given to retain them), I say publish their ADDRESSES as well.
I'm sure there's nothing on those contracts against making the recipients' information public.
With their millions, I'm sure they can afford to hire bodyguards -- preferably the unemployed Blackwater mercenaries.

Mar 19 07:23 AM

[I weep for ...:]

The real genius here is the architect of this outrage residing in the current adminstration. They were able to turn the country's attention to these bonuses (which they knew about for months and endorsed since AIG's Board is unable to take any action without running it by the Fed) and away from the billions that went to the counterparties, i.e., Goldmen, etc... They were the ones bailed out, not AIG. They were the ones who created the mortages not AIG. The day the identity of the counterparties were released the outrage from Washington was created.
It is obvious, but still the sheep all waive their pick signs and our upset that these folks got bonuses because they are trying to unwind accounts that could cost the taxpayers way more than they have paid so far!
_
The greatest trick the Devil ever pulled was getting the world to believe he didn't exist!

Mar 19 11:12 AM