Wednesday, March 18, 2009

AIG And Its Bonuses
It is hard to know where to begin with the AIG bonus fiasco. There are so many points and counter points involving the payments: who knew what when, what was promised in the government's rush to "save" AIG last fall, and what is the contractual obligation to pay the bonuses in an essentially failed company (without taxpayer money AIG would no longer exist), to name just a few. I have posted before and will probably post again that I used to work for AIG, and the few things I remember is that the AIG corporate people that dealt with the company I worked for were not that smart, and AIG had a reputation of not paying huge bonuses, at least not at the level being disclosed for AIG's infamous Financial Products division. My recollection is that a large chunk of AIG's bonus structure was in the form of deferred comp and company stock, not large cash payments. Hank Greenberg wanted loyal employees that were going to stick around and benefit when AIG's stock price increased.

I am beginning to think that the AIG Financial Product guys were pulling a fast one over AIG corporate. The guys in this division knew what they were doing was dubious and wanted to get paid cash no matter what happened. This article from New York Times' DealBook blog (thanks Talking Points Memo) has lead me to this conclusion. Here is a long quote from the article:

Hedge fund managers typically only receive 20 percent of the profits and a 2 percent administrative fee. If the funds have losses, the managers receive nothing and they lose substantially because they have a significant amount of money invested directly in the funds itself. The managers are not then paid until they make back these losses.

In A.I.G.’s case, however, employees got 30 percent with very little personal risk (we don’t know how much of their compensation was in stock) and their overhead covered. The arrangement shows the cavalier attitude of A.I.G. management and the power the financial products division had.

Second, back to that risk part and the hedge fund analogy. The agreement confirms that A.I.G. indeed flipped this notion on its head. It also confirms what was publicly disclosed. These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard. This is normal for these agreements.

Here is the clincher:

This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.

The implications seem clear, but I am not sure what to make of it all. The Democratic call to rein in bonuses is an awful idea. Like it or not, fair compensation is a great motivator and is good for the economy. The Republican false outrage and finger pointing at Treasury Secretary Geithner is disingenuous. A Republican administration and Republican appointed Fed stepped in to save AIG. All I know is that these contracts had to have been renegotiated after Hank Greenberg left AIG. He never would have allowed this type of one-sided compensation, especially when the division and people involved had the ability to sink AIG.

The AIG Financial Products guys should get their $165 million bonus. It should be in stock, with the number of shares based on $45 per share price (about what the price was a year ago) and an exercise price of $55 per share. Now that is a retention bonus.

1 comment:

nunya said...

Pretty sure that Taibbi came to the same conclusion.

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Posted Mar 19, 2009 12:49 PM