Blog Entry

A bonus track on the CD of life

Posted on: March 19, 2009 10:50 am
 

 

AIG's executives really blew this one, paying out excessive bonuses to the executives who largely are to blame for the management practices that led to the downfall of the insurance giant. Insert your public outrage here. I am hearing folks demanding action as populism calls its politicians to task, finally I might add. But before you call your politician and demand they do something to get the money back or to stop such payouts in the future you have to understand there are contracts involved. Right, wrong or indifferent there are legally binding contracts that stipulate the size of a bonus based upon deliverables within a company's framework.

But the outrage is there. Populism is demanding an end to this "unfair" practice. Bonuses are being villified as unfair. But let's change the word. Instead of calling it a bonus, let's call it what it is - an incentive.

In the sports world we all understand athletes have contracts that are often laiden with incentives. Do this by this much and we pay you this much. Athletes have guaranteed money plus incentives. They get the guaranteed cash even if they get hurt and the incentives if they perform. Sometimes these contracts are written such that it is so easy to reach the incentives, like play 10 games in an NFL season. Stay relatively healthy and you get that incentive. Pretty simple. In baseball, get 400 at bats and there you are. You get the idea. Do you have a problem with these contracts? Because there may be no emphasis on individual performance or team winning.

In the real world there are all kinds of incentive contracts that are in effect. Commission sales is the most obvious. But so is waiting tables for tips. If service is good a nice incentive is earned. The customer is not obligated to tip mind you. The waitress is obligated to give exceptional service to earn her incentive. In the case of a commission salesperson, the guaranteed money is barely enough to live on. The commission is critical to the survival of the saleswoman. Incentives are there to drive the right behavior - maximize sales, improve customer service, improve efficiency, etc. As customers or stockholders we all like incentive contracts because it drives behaviors in the right direction.

I must confess. I am an executive at my company and I have an incentive contract. I get paid a guaranteed amount of money, my base, and I get an incentive bonus that can be lucrative (not by major league standards). In 2008, our first three quarters were strong and profits were outstanding. Our fourth quarter tanked like everyone else. Overall, we had a good year. But as the economy continues to drag on we have made personnel cuts. We are sharply cutting spending. We are doing everything in our power to weather the storm. But - we paid our executive bonuses. They were the smallest they have been in years, but we paid them. We discussed whether we should pay them. Some folks wanted their money. They felt they had earned it and by all rights, they had. Others felt is was bad form to pay the bonuses in light of layoffs. I tended toward the latter group but I will tell you I cashed the check they sent me. The discussion was ended when we were reminded that we were under contract to pay the bonuses. The company would not violate it's end of the bargain. The bonuses were earned based on the governing inputs (profit, market share, customer satisfaction, etc.) and we would get paid the money. We were also reminded that some people would make a court case out of it if they were not paid what they had earned. A true statement. Regardless, the company had met its objectives.

So, what do we do? Do we allow our politicians and bleeding hearts make it passe to accept a bonus? I remind you incentives are earned not accepted. Before you answer, I worked approximately 3000 hours last year and traveled 114 days out of the year. I worked while on vacation. I worked while I watched sporting events on TV. I worked in the airport, on the plane, in the hotel, at the pool - you name it and my Blackberry or laptop was on line and I was available. Sure I traveled to Europe but not with loved ones and they were not vacations. Twelve to fourteen hour days are average. The glamorous life it is not.

And my last point. The federal and state governments took a combined 41% of it. To use however they see fit. Paying for stuff I don't want. I earned it and they took it.

Incentives are good, right?

Category: NCAAB
Tags: Incentives
 
Comments

Since: Mar 20, 2008
Posted on: March 20, 2009 1:35 pm
 

A bonus track on the CD of life

 A decapitation would be catastrophic to most if not all companies.  Just the way it is.




Since: Oct 14, 2006
Posted on: March 20, 2009 10:17 am
 

A bonus track on the CD of life

 

Imagine this scenario. The government demands the exodus from AIG the executives who received bonuses. Does AIG fail? Imagine if the Yankees fired their whole team and hired a new team tomorrow. How good will they be this year? Last place? You bet.

 

 

I wouldn't be so certain about that one Smorgie...sometimes ...as a matter of fact in a lot of cases change is good...a total cleansing is needed...

BTW ...The  Yankees would not be a good analogy..as a matter of fact totally is contradictory to your point...they change players ..in bunches every year....

Think about it...they cut loose one of the most successful managers of all time ....and really didn't skip a beat....




Since: Mar 20, 2008
Posted on: March 20, 2009 9:55 am
 

A bonus track on the CD of life

Sunnysidez - Remember, the firms eventually must pay back the loans to the government.

The house passed the bill to punitively tax the bonuses. Amazing. This is unconstitutional. And they know it. And the Supreme Court will strike it down. Or they better. You see the Constitution does not allow laws that single out narrow groups of individuals for any reason.

Imagine this scenario. The government demands the exodus from AIG the executives who received bonuses. Does AIG fail? Imagine if the Yankees fired their whole team and hired a new team tomorrow. How good will they be this year? Last place? You bet.

Imagine if you received a loan from your bank to start a business and they demanded you could not pay your staff or yourself a bonus until you paid back the loan. What if you were current on all of your loan payments and were profitable? Do you still think that makes sense to impose rules that impact our business?


 

From the Washington Post courtesy of MSNBC

In February, after Congress imposed restrictions on compensation for senior executives at companies that accepted federal aid, several banks asked the Treasury Department for permission to return the government's investment. The much broader restrictions now being considered by Congress could add urgency to that exodus. Indeed, one industry official said the legislation would drive departures even if it does not become law because banks are worried about what Congress might do next.

Some banks that received government money don't need it. Others cannot afford to return it. The vast majority of aid recipients, however, fall in a middle category: They can afford to return the money, but they would be significantly weakened, restricting their lending.

Officials fear that if the healthiest banks begin to return the money, weak banks will be forced to follow. The weak banks would be even less able to make loans and the sickest could be in danger of failing if the stigma of remaining in the program costs them the confidence of investors, customers and businesses.

Looking to defuse situation

So far, the government has prevailed on most banks to keep the money. Only four have asked to return it. But others are growing increasingly restive. "I think there will be a strong desire to pay the money back," said an executive at one major bank.

Industry groups were exploring ways last night to defuse the situation. The Securities Industry and Financial Markets Association, a trade group, was consulting a constitutional lawyer because the bill targets a narrow group of people and is retroactive in nature, sources said.

The association declined to comment last night.

Businesses already have concerns about attempts by Congress to impose restrictions on banks that took federal aid. Some bankers warned that the new legislation, even if it does not become law, still would damage the government's ability to engage with private companies, including its nascent plan to partner with private investors to buy toxic assets from banks.

The impact of such legislation would fall disproportionately on New York City, home to many of the nation's best-paid bankers. The city's economy is fueled by the major banks, and the yearly bonus payments collected by their employees have helped to fill the city's coffers, float its real estate market and produce annual spikes in sales of luxuries such as diamond jewelry and high-performance sports cars.

In a reflection of the political environment, however, the House legislation was sponsored by two Democrats from New York, Reps. Steve Israel and Charles B. Rangel, and the Senate bill had the support of Sen. Charles E. Schumer (D-N.Y.).

"Once firms take government money, they can't play by the old rules," Schumer said. "The legislation won't apply to these firms as soon as they pay back the government."

Also - "The new legislation, which targets bonuses paid to employees of U.S. companies, also creates a competitive advantage for foreign banks such as Deutsche Bank, which is based in Germany but operates one of the largest investment banks in New York, leaders warn."




Since: Jan 23, 2009
Posted on: March 19, 2009 8:38 pm
 

A bonus track on the CD of life

 "The U.S. government has now violated those terms.  It's the breach of contract I have a problem with."

 

Yea, I know a few GM retirees that feel the same way. Wink 




Since: Feb 18, 2008
Posted on: March 19, 2009 5:07 pm
 

A bonus track on the CD of life

 Sunnysidez nailed it.  If you take tax payer money, you have to put up with tax payer oversight.

 

 

But that is not what we got.  What we got is retroactive regulation, which is a no-no.  I am all for hanging AIG out to dry, but AIG was given specific terms for the bailout.  The U.S. government has now violated those terms.  It's the breach of contract I have a problem with. 




Since: Jan 23, 2009
Posted on: March 19, 2009 4:44 pm
 

A bonus track on the CD of life

Sunnysidez nailed it.  If you take tax payer money, you have to put up with tax payer oversight.

 




Since: Oct 14, 2006
Posted on: March 19, 2009 2:42 pm
 

A bonus track on the CD of life

 BTW - all you have to do is pick up the prospectus of a company to find out the CEO's compensation incentive.  But

You are right......as a stock holder you can pretty much find out all the salaries if yo dig deep enough..

  But the funny thing is, Geithner set up the AIG bonus and now he and his boss now rail against it.

 

 

Your are right..they are covering their arses ...they blew this one....ironic really...AIG asks for a government bailout....in return the government gives it to them without any pre - conditions??...What the Frack???...

Now the Democrats want to tax the AIG exec bonus at 90%

 

 

That is insane...and I do not beleive it to be legal under the current tax code...I could be wrong..

Smorgie for having such a wonderful St. Patrick's Day party

 

 

 I misssed the invite...Frown




Since: Dec 31, 2007
Posted on: March 19, 2009 2:40 pm
 

A bonus track on the CD of life

 Yeah bonus all you want.

 

Just don't do it with money from Tax payers who bailed you out to keep your company afloat.

 

Simple as that.




Since: Mar 20, 2008
Posted on: March 19, 2009 1:29 pm
 

A bonus track on the CD of life

 Slaton - Please re-read the first sentence in the blog.  I did not say AIG execs deserved anything. I said they blew it.  My point of the blog was to caution the populists against the villification of executives and executive bonuses.  Executive compensation should be appropriately high to warrant the leadership they give.  If they fail they should be paid little or nothing.  Bill Ford at Ford took only $1 salary the last couple of years before he yielded to Mullally.  He did get a bonus, in the form of stock options.

Now the Democrats want to tax the AIG exec bonus at 90% and publicly announce their names and how much they made last year.  Regardless of whether these folks deserved the bonus, do you support such a draconian approach?  How do the other executives plan to do business?  BTW - all you have to do is pick up the prospectus of a company to find out the CEO's compensation incentive.  But the funny thing is, Geithner set up the AIG bonus and now he and his boss now rail against it.

While I am at it I want to thank Smorgie for having such a wonderful St. Patrick's Day party.  Whooops, I was reading my teleprompter.

I guess I have to give myself a C- grade on this blog because I was not clear in my intent.  I apologize and will commit hari kari.  Is that good enough Chuck?

 




Since: Oct 14, 2006
Posted on: March 19, 2009 11:34 am
 

A bonus track on the CD of life

 Smorige...not sure if your ananolgy is a good one here...Baseball and AIG??...not even close....

As far as paying  out bonuses...it depends...

Most "good " company's have a "gatekeeper" that opens up the MBO  or bonus window for eligibility... to open that gatekeeper it is usually based on  top line and bottom line revenue figures...Some businesses either use a sliding scale  for percenatge of payout if the revenue lines are missed...others have zero payouts if either revenue line is missed. 

AIG hit neither..by a mile...needing billions to stay a float......What their standard is or was for a bonus plan doesn't seem to be insync with the viability or success of the business..In simplistic terms..How do you pay some one for failing?..Pay bonuses??..how about terminating or bring prosecution where applicable.



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