AIG Gives Bonuses a Bad Name

Everybody is talking about AIG again. The conversation is about how they continue to throw tax-payer money away. Over the weekend new details of AIG’s bonus plans were made public. In a nutshell the company plans to pay about $165 million in bonuses to executives in the same business unit that brought the company to the brink of collapse last year. The most frequent word used in the media to describe the feelings of the average American is outrage.

Although the government, an 80% owner of the company, says it can do little to change the payout because it is contractually obligated and may face lawsuits if bonuses are not paid, that response highlights in my mind once again that the bailout plan was executed with almost no knowledge of human behavior.

There seems to have been no analysis of what the impact the bailout would have on the behavior of employees of the company. Money falling on "business as usual" behavior will create more business as usual. It should therefore not be surprising that management approved luxury meetings and other behavioral excesses since these were the behaviors associated with prior years of huge profits.

AIG would have had less outrage if the words associated with the money were "deferred compensation" rather than bonus. If these executives were hired and the compensation was to be paid in two payout methods, one on a monthly salary and the other a lump-sum payout at the end of the year, I believe most people would understand.

However, the word bonus has different connotations. It usually implies at least two things: The first that bonuses are awarded for some valuable accomplishment. While there were no doubt many valuable behaviors on the part of the company’s 116, 000 employees, it is difficult for most people to understand how you can pay for them when you lose $40 billion.

The second most common use of the term is discretionary, meaning in this context that it is above and beyond what employees expect. Obviously this was not the culture at AIG. Although it might not be a fair assessment of what went on, the word, earned, is not prominent in any of the descriptions of the compensation contingencies. It appears that employees felt they had a right to the bonus independent of the fortunes of the company.

The other reason the company used to justify the bonuses is that they were needed to retain talented people, a retention bonus. Let me say that based on 40 years of business experience that if you think you can pay people to stay with a company that they don’t like, you will waste a lot of money. AIG will pay the retention bonuses and the people will still leave them at the first opportunity. It strikes me as odd that with all the unemployment on Wall Street these days that a large number of people would actually leave anyway. The fact that the company thinks that they have employees that cannot be replaced is a failing of their professional development system in the company.

In my opinion until businesses get serious about behavior, problems like AIG will continue to occur. As Thomas Gilbert, author of Human Competence said, "Money is a beautifully honed instrument for recognizing and creating worthy performance. It is the principal tool for supplying incentives for competence and therefore deserves great respect. Any frivolous use of money weakens its power to promote human capital – the true wealth of nations."

It appears to me that AIG has greatly disrespected the instrument.