Putting Retention Bonuses in Perspective (one cent)

Retention bonuses do have their place, you know.  Particularly for businesses in trouble, even businesses in bankruptcy.  A simple example:  a business is being liquidated in bankruptcy.  The task is to maximize the amount of funds available for creditos.  This means collecting from customers who owe money.  The business has an employee who has an excellent relationship with the customers and a good track record collecting receivables.  But this employee needs to find another job, with a company not in liquidation.  The trustee in bankruptcy approaches the employee with an offer:  stay with us for the next six months and, if you do, in addition to your regular salary, we will give you 10% of what you collect, or we will give you an additional $25,000.  Something like that.  It happens all the time, and not only is there nothing wrong with it, it has only positive aspects.

So, if the task of AIG is to wind down certain entanglements created by its hedge fund operation, and if this requires time and expertise, and if the individuals at the company have not been personally involved in illegal activities, there is nothing wrong with saying:  stay for the next six months (or longer if it takes longer) and wind down this business for us and if you succeed (presumably within certain parameters), you will get a retention bonus of $XXXX.   There is nothing wrong with that, either.

With the exception of how much money $XXXX is.  If it is not $25,0000, or $50,000, but is instead $1 million, or $3 million, that seems outrageous.

Now it doesn’t bother me that the funds are coming from TARP or other federal funds.  Afterall, federal funds are used to pay salaries, among other things, and if a retention bonus is the equivalent of a salary (i.e., funds paid to someone for accomplishing a bank of work), that is OK.  But again when it gets to seven figures……..

Apparently, AIG management at the time saw nothing wrong with the arrangement, and even thought it beneficial.  Apparently, the FED and the Treasury Department agreed.

What is wrong with this picture?

What is wrong is not AIG, but the general compensation level of those involved in the investment banking and financial services businesses over the past decade or more.  Similar retention arrangements were made at other institutions, and would have been made presumably at many others, if they were in AIG’s position. For the recipients of the money, it seemed normal that they should earn this much.  For those who paid, or approved the payments, it seemed normal they should pay this much.

Top executive salaries, and the salaries of those who are not top executives, but who share in the responsibility for assuring that their business organizations made scads of money, have received their share of criticism, to be sure.  But no one did anything about it.

Now, perhaps someone will.   And not only with regard to AIG.  I do not believe anyone should be permitted to make this amount of money, as a retention bonus or otherwise.  The way to discourage that may simply be to put a confiscatory tax on earnings over, say, $1 million per year (subject to inflationary adjustments), or to preclude employers from deducting salaries paid above this level.  In addition, payments in stock or stock options would also have to be controlled.

The arguments against seem to be:  you don’t want to punish entrepreneurship (I don’t think this would discourage anyone, other than those whom we don’t want to encourage).  It is against the American way (balderdash!).  The government is incapable of regulation (this is not regulation; it is simply an income tax code adjustment.)

At any rate, this is my quick and dirty opinion.  (One day, I’ll also write about my support for earmarks.)

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