AIG Bonus Fiasco and Congress Response

I’m sure that by now everyone is aware of the scandal about bailout recipient American International Group (AIG) paying out more than $165M (some have put the figure at over $200M) in bonuses to its top executives. The American taxpayers are justifiably upset as they see it as their money, collected though taxes, going directly into the pockets of the people who are seen as having caused the current recession.

To cash in on this outrage, the U.S. House of Representatives recently passed a Bill that would make the bonuses subject to a 90% tax.  The tax would apply to employees of bailed out companies who make more than $250,000 per year receiving a bonus after December 31, 2008.  The Senate is, to use Canadian terms, is taking a minute for sober second thought.

This Bill passed by Congress does not sit well with me. Without passing judgement on whether or not I think the executives deserve the bonuses, I will say that this sets a very poor precedent in governance. The message for future lawmakers seems to be “if you don’t like someone’s compensation package, you can take it away through taxes”. If the bonuses are outlined in a contract, there should not be a reason for the government to step in and take that money away.

In the past, poor performance was handled through disciplinary action leading up to termination. I don’t see why this case should be any different. In order to do this, it requires proof of said poor performance. Let us not forget that the Bill will affect people who may have had nothing to do with financial trading. For example, if the VP of IT at AIG is a recipient of a bonus payment, that individual had nothing to do with the recession. Why should he/she be subject to this collective punishment?

Don’t get me wrong. I understand the frustration and outrage felt by people who are suffering in the recession. However, I think there are better ways to set things right when it comes to compensation. 90% taxes are not the way to go and I’m happy to see that the Senate is taking a second look at this Bill.

4 Comments on "AIG Bonus Fiasco and Congress Response"

  1. Let’s go back a few months to the auto industry bailout. There were a lot of people braying for autoworkers to take a pay cut. This seems to be a similar situation except for its white-collar instead of blue-colour workers. Also AIG wrecked the economy and the autoworkers make cars.

    This isn’t, btw, an accusation against you being a hypocrite: but at the Senate Republicans. Personally, I think that in normal times the goverment shouldn’t be regulating people’s pay in this fashion. These aren’t normal times. Everyone’s taking a haircut here, not the least taxpayers who are out scores of billions of dollars. Why should the only people immune be AIG executives?

    Lawerence Gridin’s take on this is definitely worth reading (for those that haven’t already)

  2. Jacob,
    I see your point. Let me offer a counter-argument. In the case of autoworkers, the argument went that it is their high wages are making their respective companies uncompetitive (I won’t comment on the validity of the argument). Therefore, the pressure was on to come up with a contract that is more in line with other car companies.

    In the case of AIG (and other banks), the bonuses are not driving the company out of business and are not being taken away by a negotiated contract, but by act of Congress.

    The part about Congress involvement is what makes it so wrong. Don’t misunderstand what I’m saying: I’m not saying that AIG execs have a God-given right to those bonus. However, I am sure that there is (or should be) some kind of internal mechanism for dealing with such cases without the involvement of the government. If there isn’t, AIG should consider this a lesson learned, but the government should still not be getting involved in deciding compensation, in my opinion, in either good times or bad.

  3. Unfortunately, the bonus denial tax is a bit overextensive in that it catches some people who had nothing to do with AIG’s shady credit default swaps.

    However, even those that weren’t involved surely cannot expect to receive a performance-based bonus in a year when the company went bankrupt (had it not been for government intervention).

    Also keep in mind that the tax applies only on amounts over $125,000. Nobody is going to starve.

  4. David Dzidzikashvili | April 5, 2009 at 10:26 pm |

    After the government gave AIG bailout money, they should have used ownership rights and cancelled all performance bonuses and laid off the executives who have done nothing but run the company to ground. It is insane how AIG justified their action and rewarded failure. At the end of the day, it’s the US taxpayer that is getting screwed left and right. How come nobody is thinking about bailing out the middle class that is losing jobs and homes?

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