This will make me quite unpopular I think, but it's time to look realistically at the "outrage" over AIG "bonuses".
A little outrage over what seems to be undeserved and extravagant bonuses may not be a bad thing on the surface, but take a minute to look below the surface of these retention payments.
I also want to take a minute to address the outrage that shouldn't be there about trips given to top performers.
Folks, these are INVESTMENTS IN HUMAN CAPITAL that will payoff in the long run and are therefore NECESSARY AND GOOD BUSINESS. Join me below the fold for a rational, unemotional look at good business practices.
UPDATE: Thanks to everyone for proving my point. Nice set of trees you've all got there, I wonder if it's a forest. Let me address some comments.
- Do I believe that the top execs deserve such lavish pay? NO. However, the message of violating agreements (tacit or written) percolate down to everyone in the company and make it difficult to attract ANYONE to work for you.
- Is AIG blameless? NO.
- Should bonuses be quelled in bad business times? It depends. If they are performance based, yes. If they are "don't go somewhere else and we'll pay you in the future", NO. Promises must be kept, even if they are stupid and ludicrous promises.
Thanks to JimG in the comments for seeing the point. It is a systemic problem, not a compensation (except for overly high salaries for the top guys) problem.
Here is an op-ed from Jake DeSantis from AIG, tendering his resignation.
Some outtakes and discussion.
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
This sets up the fact that many of those employees who are having their bonus scrutinized and taxed were completely free of responsibility for the tanking of the company. Thus, the outrage of many regarding the money paid to these people is misplaced. Those responsible are long gone, and not being targeted by the rage people feel.
An analogy. A store owner is robbed but unable to chase down the robber. Rightfully angry, he goes up to an innocent bystander and hits him over the head.
Is he right to be angry? YES. But look, take it out on the right people.
After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials.
This indignation is well placed. At the very least, there is a psychological contract between AIG and these employees, that if they remain with the company, they will be rewarded.
That contract was violated and will lead to negative behavior by ALL remaining employees. This is BAD for the long term health of AIG and the probability of the taxpayer recovering their money.
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
Translation: These employees are ALSO hurt by the actions of those who lost all the money in the credit default swaps.
So - be mad, be indignant, but look, direct the rage at those responsible, not other victims.
Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.
Retention "bonuses" are just that. They are a reward for not leaving the company and being bid away by a competitor. True in both good times and bad.
The breach of these promises will make it VERY DIFFICULT if NOT IMPOSSIBLE for AIG to attract and retain good employees with promises of future pay because their past actions suggest that these contracts will not be honored. Again, this is damaging to the long term ability of AIG to become profitable and repay the tax payers.
Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be "shoved out the door."
Bad blood. Indeed, I am sure that many current employees feel this way and as I have said, it will negatively impact AIG's ability to retain and attract future staff.
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Let me know turn to the outrage over "lavish trips" given to top executives and sales people.
Trips and other recognition to high level employees are investments in the employee.
There are two types of "exchange" contracts which employees engage in with their employers. The first is economic, payment for services. This is salary, bonus, etc. It is one of the primary reasons people work for a firm. But there is a second, and that is a social exchange. When the company shows employees that they are valued members of the firm, this feeling leads to behavior "outside of those that are formally recognized by the compensation system of the firm".
In English, those behaviors that are valuable to the firm but that you can't make employees do or fire them if they don't. Helping others, saying nice things about the company, doing things not in your job description, etc. These things are ESSENTIAL for a company to succeed.
What leads to these feelings of value?
- Honoring the psychological contract (see above).
Another way is to provide items that create vivid memories about how the company cares for their employees. ummmmm... Like, nice trips with (or without) your family.
Every time this trip is recalled (particularly if with family), it creates a feeling of being valued by your employer. This is good, because it increases commitment to the firm, which increases the intent to remain, and the willingness to contribute "above and beyond" that required in their contract.
As I have said earlier, this is VALUABLE to a firm.
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Here's the bottom line. The world will come out of this recession. When it does, the boomers will start retiring and there will be a "talent shortage". In order for a company to be successful, they will need to attract and retain good employees.
Retention is aided when employees feel valued by their company. If it is simply an economic relationship, then when offered more by another company they will leave. If however, it is more of a social relationship, where the employee feels valued BEYOND A PAYCHECK, then it will be easier to keep them since they are getting MORE THAN MONEY.
The way to attract and retain people is also to be true to your word and honor your contracts (real or psychological). AIG has now breached the trust of their employees and attraction and retention in the future will now be very difficult.