AIG has been in the news again, this time for bleeding taxpayers out of hundreds of millions of dollars to pay employee bonuses for a job well done in 2008. Most egregiously, the very division that bankrupted the company is sucking down $165 million in 2008 bonus. Is there some sort of contract that would require the company to pay these bonuses? The company essentially went bankrupt in the fall of 2008, though the U.S. governnment tried to avoid the actual word “bankruptcy”. When a company goes bankrupt, it doesn’t pay most of its obligations under old contracts and certainly does not pay bonuses to the employees who ran it into the ground (not for moral reasons but simply because it no longer has the cash).
The AIG management has said that they needed to do this in order to retain critical employees. This shows a worrisome lack of basic business knowledge. To give an employee an incentive to stay, you would offer money to be paid in the future, after the accomplishment of some goals or at least remaining at his or her desk for another year. One guy received $6.4 million. For most rational people, that would be an incentive to take some time off and enjoy life, not to keep going into work at America’s objectively stupidest company (they ran up losses far larger than traditional candidates for this title, such as G.M. and Chrysler). The manager of your local McDonald’s is savvier about retention strategy than the AIG executives. McDonald’s doesn’t say “We had a bad year last year and you might be discouraged, so we’re writing you a fat check unconditionally in hopes that you will like us and stick around this year.”
AIG has some complex problems. Figuring out that writing people checks for what they did last year isn’t a “retention incentive” does not require a lot of thought. Would we trust a manager who can’t figure out the simple stuff to figure out the complex stuff? I say “no.” We (the taxpayers) own AIG. We should fire the top 20 managers immediately as an example to the rest. They should be replaced with people who have never been employed by AIG; it would be bad to promote the next tier of AIG employees up to the top because that would effectively be a reward for their demonstrated incompetence in 2008.
Is it risky to replace the top management of a company? We voters do it every 4-8 years for the U.S. government, a vastly more complex operation than AIG.
[Update following a review of the comments: I recognize that these bonuses, from the perspective of early 2008, were for the purposes of "retention". However, the company essentially went bankrupt in late 2008 and there is no way that a bankruptcy judge would have approved the payouts at 100 cents on the dollar. I guess you could argue that the banks that sucked down billions of dollars from AIG did not suffer the effects of a constructive bankruptcy, so why should the employees. On the other hand, these are the very employees who were responsible for the bankruptcy. Foreign banks got billions of dollars, dwarfing these bonus payments, but they had nothing to do with AIG's self-inflicted wounds. If we can't stop Wall Street's "heads I win; tails you lose" compensation structure, 100 percent of U.S. wealth is going to be transferred to Greenwich, Connecticut, the Hamptons, and the Upper East Side. Why not stop it here and now?]