Politics

Heads They Win, Tails They Break Even

By Karina

The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises continues its hearing to fully examine the American International Group (AIG) and released the AIG employee contracts including the terms of the “retention” bonuses:

2008 Employee Retention Plan>>

Confirmation and Acknowledgment>>

Schedule to the Master Agreement>>

Chairman Barney Frank discusses the AIG employee contracts:

…the problem is not the dollar amount but the incentive structure - it’s a heads they win, tails they break even?

We’re the effective owners of this company. What we ought to be doing is exercising our rights as the owners to bring lawsuits to say ‘these people performed so badly, the magnitude of the losses was so great, that we are justified in rescinding the bonuses’. That may be a controversial lawsuit but it is a better one than trying to interfere under regulatory authority, and I think it is worth trying. And I think there could be a good case made that the bonuses granted by people who in fact incurred great net losses by their work ought not to be granted?

As you read this contract it appears to me to be signed in contemplation of serious losses…what it says is if you make money, you get money, but if you make money which is outweighed by losing money, you still get the bonus. Those are bad incentives. And as for retention, no, I do not think these are the people you want to retain…human nature being as it is, I think there’s a lot to be said about having people who were not the people who made the mistakes undo them. The natural tendency to protect your own mistakes comes into play.

Earlier coverage of the hearing on the Gavel>>

Watch the hearing live via webcast>>

Full post as published by The Gavel on March 18, 2009 (boomark / email).