Out of Control Policy Blog

The Good In AIG's Bonuses

The government is taking issue with AIG handing out bonuses to its employees--but these bonuses are a part of the company's typical compensation system. Its just the way they chose to pay their employees, and its based on some pretty good thinking.

Many firms (and not just on Wall Street) pay their employees a lower base salary but with the chance to earn a large bonus based on performance. Some firms will pay at least the same bonus as the year before, other firms have a minimum guaranteed bonus, still other firms may not give much of a bonus at all if performance is poor--of course if it was that bad they might be fired. All that to say, bonuses are a built in part of the compensation process, legally written into contracts, and that should be respected.

Bonuses aren't always handled appropriately. Sometimes they create perverse incentives. And the specific way that AIG handed bonuses probably does need some review. However, the concept shouldn't be vilified. Most importantly, the government shouldn't be upset that people at AIG are getting paid for their job as was promised.

The more contracts that are voided by the government--either this or through something like cramdowns--the less effective they will be in the future, complicating a whole host of business activity.

UPDATE

Rep. Barney Frank, chair of the House Financial Services Committee also has said this: "These people may have a right to their bonuses. They don't have a right to their jobs forever." I completely agree, and this is a much better attitude to take towards AIG. Government failure aided in AIG's troubles, but ultimately the firm is where it is because the failure of leadership, human error. Companies are controlled by humans who can mess up. And, by the way, so is the government.

Anthony Randazzo is Director of Economic Research


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Comments to "The Good In AIG's Bonuses":

Gary | March 17, 2009, 2:42am | #

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