Boneheaded Compensation Plans #2

Mar 15, 2009

When I posted “Boneheaded Compensation Plans #1” three months ago (12/19/08), I commented that the “#1″ was appropriate in the title because this would definitely be a recurring topic. And I was right.

The big story today is about AIG planning to pay out another $165MM in bonuses. Yow! Edward M. Liddy, the government-appointed chairman of AIG, said (a) that they had determined that AIG was legally required to pay the bonuses, and (b) “We cannot attract and retain the best and the brightest talent . . . yada yada yada . . .”

The problem is that as excessive as these bonuses appear — and it really does seem that way— Mr. Liddy might actually be right. On both counts:
  1. Companies that make deals with their workers should stick to them. Who knows if the AIG agreements are really binding or not? But this is part of an honorable relationship between employer and employee.
  2. These bonuses were being paid out to about 400 managers, most of whom are competent insurance executives who had little to do with the fantastically bad recent decisions that got AIG into their current pickle. The Treasury has sunk $170 billion into keeping AIG as a going concern, which AIG will no longer be if its senior talent leaves. Obviously, it’s hard to tell who or how many would leave in disgust over a reneged bonus, but the ones most likely to leave are the ones AIG (and, now, the U.S. taxpayers) can least afford to lose.

Where is the real problem? Well, it seems to me that AIG’s corporate directors, and especially the ones who were serving on the compensation committee, should be spending a little quality time in front of a mirror, asking themselves questions like:
  1. Were the bonus metrics properly related to high-level corporate strategic (and stockholder) objectives?
  2. Was the size of the total bonus pool properly tied to overall corporate results?
  3. Did the bonus calculation algorithms properly reward/punish over/underachievement? A good bonus plan leads to sensible bonus payouts at ALL levels of likely outcomes.

Sorry to be throwing technical terms like “boneheaded” at you, but it’s hard to imagine that a bonus scheme that pays out to the tune of nine digits given performance like AIG’s isn’t exactly that. AIG is in an ugly, embarrassing situation, almost certainly because of a comp plan that shouldn’t have been in place to begin with.

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