A.I.G. Bonuses, Ethics, and the Rule of Law

It’s not unethical to pay people money you are contractually obligated to pay them. Even if doing so makes you, or other people, want to pull your hair out. It’s the right thing to do. Not always because the person getting the money deserves it, in some abstract sense, but because you promised.

From the NY Times: A.I.G. Paying $165 Million in Bonuses After Federal Bailout

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them….

You don’t have to like it, any more than you have to like providing state-appointed attorneys to child molesters (not that I’m comparing…well, you know.) Anyway, the point is: there are some things a civilized people governed by laws (rather than by the passions of the moment) have to uphold. The right of the accused to assistance in his defense is one; the right to speak (even if what you say is abhorrent) is a second; and the fulfillment of contracts is another.

The key source of outrage here is the fact that A.I.G. execs did such a miserable job, and yet are being rewarded with public money. Isn’t that worth violating even legally-binding contracts? Two points need to be made about that.

First, let’s not forget that although there is surely plenty of blame to go around within the walls of A.I.G., it’s highly unlikely that every single one of the people who is owed a bonus payment was derelict in their duties. I’m not sure it’s fair to want to punish everyone.

Second, if people are owed bonuses despite having done a lousy job, that means a mistake was made when the bonus system was set up. Putting appropriate incentive structures in place is, believe it or not, a challenging corporate governance problem. It looks like bad choices were made in setting that system up at A.I.G. And, unfortunately, those are bad choices that the U.S. taxpayer inherits (along with many others, no doubt) as the new de facto owners of A.I.G. It was a miscalculated (perhaps inept) promise, but the solution is not to renege on that promise now.

22 comments so far

  1. Ju on

    AIG = Allowing Irreversible Greed.AIG = All in Greed.AIG = Arn’t I Greedy.AIG = A$#holes, in general.This is sick. Why in the world are we helping these companies that keep sending millions to people who do not know how to run a company? They cry yet get paid millions on the “average joes” taxes. Furthermore, I fear this is just the tip of the iceberg. Look what Enterprise rent-a-car did to get bailout funds: < HREF="http://www.butasforme.com/2009/02/25/alert-enterprise-rent-a-car-may-have-fired-employees-as-fake-evidence-when-lobbing-for-bailout-money/" REL="nofollow">http://www.butasforme.com/2009/02/25/alert-enterprise-rent-a-car-may-have-fired-employees-as-fake-evidence-when-lobbing-for-bailout-money/<>Not to make excuses for these people, but the bailouts are making crooks out of everyone that touches the money.

  2. Chris MacDonald on

    Dear Pro:Um, hello?Did you even read my blog posting? Nothing you said here bothers to acknowledge anything I said. This is a *comments* section — a place to respond to the blog posting — not a random rant section, or an excuse to link to your own (?) blog.Chris.

  3. PhilBucks Dot Com on

    Thank you for writing this article. It is scary that the rule of law and The Constition does not matter to people. Obama and Geithner and Barney Frank all say they are “shocked that gambling is going on here”. These contracts were in place before Libby was the president of AIG, and AIG is obligated to pay what they agreed to, whether the people are shmucks or swindlers or bums. This situation should have been addressed by Bush and Paulson and Barney Frank before the taxpayers were on the hook for anything. But the politicians were taking care of their own and they know it. Do not blame AIG for fulfilling its legally binding promises. Blame the people who gave taxpayer money to AIG knowing good and well that they were legally obligated to pay these ridiculous scandalous bonuses. Blame whoever authorized the money going to a company with these stupid deals. If giving money to AIG had to be done regardless, then so be it. Tell taxpayers the truth instead of pointing the finger at AIG. And no, The President of The United States and Congress do not, and should not, have the authority to manadate that these companies not be legally obligated to follow the law just because they got some taxpayer money. As taxpayers we should spend more time scrutinizing money being spent by our elected officials and blame them. Be angry at the politicians for allowing this to happen.

  4. A voice in the wilderness on

    Chris:Much as it burns my … You are correct. A contract must be honored or all contracts are void. I aslo agree that the board (or who ever set up the bonus structure) do deserve to be fired.

  5. Anonymous on

    The one issue the post fails to discuss is that if it were not for the gov’t bailout, then AIG would have had to file for bankruptcy and the bonuses would not be paid. Thus, I’m not sure I’d say the executives are being “punished” if they do not get a bonus. Even though all of those people may not have been “derelict in their duties,” they did join that company of their own free will and therefore accepted the risk that the company would fail.

  6. G. Jerry van Rossum on

    Well stated Chris,There are other remedies that the new owners can apply, however that is a governance issue that needs to be developed and also reported on by all media. The unfortunate issue is that in the world of instant media coverage and cable news, that such issues are used for instant gratification of the news media in order to boost ratings. As a result we will get “half baked reporting” and methodologies to gain greater ratings by people who may or may not understand the complex issues and then commented on by even less knowledgeable news anchors. (As an aside but to buttress my argument–I have watched a specific group of cable news broadcasters move from castigating bridge loans to automobile manufacturers and their products to supporting the industry and their products — and all within a one week news cycle.) We can be outraged by the seeming immorality of the systems of bonuses in the financial sector or we can also take action by refusing to invest in such companies. However shouldn’t we have done such research before investing? Perhaps we need to ask ourselves another question–that is can we really compare our household budget systems to those of corporations and governments? I think not as those systems are at times at odds with each other. Perhaps we need to ask for clear explanations along with transparency. G. Jerry van Rossum

  7. Chris MacDonald on

    Phil:I appreciate your agreement, but I’m not sure it’s the politicians’ fault, either. They needed (I think) to bail out AIG. Along with that comes some unpleasant consequences, like having to pay bonuses to people who maybe don’t really deserve them. They inherited those obligations, but they’re real obligations for them too.Chris.

  8. Anonymous on

    Changing circumstances cannot lead to a revision of ill-advised incentive/governance structures or any other type of badly conceived contract? Especially when the change in circumstances is so substantial? Are contracts somehow sacrosanct? Haven’t car makers like Ford changed their contracts with employees and therefore increased the likelihood of survival? An economic crisis of this proportion and the public support for AIG clearly require an openness to such revisions. The idea that contracts need to be upheld “no matter what” shows an odd devotion to deontological/Kantian reasoning. I am more inclined to side on this one with President Obama, who today has promised to do anythintg he can to stop AIG’s completely irresponsible choice of “honoring their contractual obligations” (see http://news.yahoo.com/s/ap/20090316/ap_on_go_pr_wh/aig_outrage ). I prefer the President’s greater concern with the utilitarian notion of maximizing overall good and doing away with prior contractual promises. The ethical choice, pretty clearly, is to stop AIG from paying out these bonuses: the greater good takes priority over prior promises. Cheers, Marc

  9. Chris MacDonald on

    Marc:I sympathize entirely with Obama’s <>sentiment<>, and if I were in his shoes I’d probably be expressing exactly the same outrage.But Obama’s argument isn’t utilitarian: it’s deontic. It’s about desert.I think contracts can be broken in extreme situations. I doubt it’s worth it here. My quick math says the bonus money is 1/10 of 1 percent of the AIG bailout. So breaking those contracts wouldn’t make a huge difference to the survival of AIG. It could only be done for retribution, and I doubt it could be done fairly (i.e., based on a fair assessment of how much <>each<> employee contributed to the failure of AIG).CM

  10. Anonymous on

    Chris I think that politicians do have some blame to take. Not for bailing out AIG, since at the point where we got, not doing so would just make matters much worse. Politicians are responsible, tough, for leaving the tax payers hostage of incompetent, imoral business leaders whose greed transformed virtually the whole planet into a pseudo-chaos.Doctors, engineers, pharmacists and many other professions hold a certain code of conduct they should live up to daily, otherwise they would suffer severe consequences to their professional carrers and even personal lives. It’s high time politicians looked into the management profession with more objective eyes. There could have been some sort of condition for bailing out, one that would require bonus not to be paid and personal assets of senior managers to be blocked, for instance. Business leaders must be held accountable for causing this much (or even much less) damage to society.Unfortunately we’re late in the game, and the rule of law must be preserved. AIG CEO and his team should be laughing aloud…- Rogerio MarquesToronto, ON

  11. Anonymous on

    I didn’t mean to suggest that Obama’s *statements* were necessarily utilitarian. (A good politician knows that utilitarian/rational calculus generally doesn’t go over with the public too well. The public tends to respond more to sentiments, emotions, etc. – see W’s and Sarah Palin’s success in some states.) However, I did want to suggest that for utilitarian reasons, Obama’s argument makes perfect sense – irrespective of his rhetoric of “desert,” “fairness,” etc. Any utilitarian calculus would consider the decision to block bonuses and therefore failing to honor these bonus contracts in the following context: It would send a powerful message to the entire business community that the “party is over” (these bonus contracts were written when the party was in full swing) and that they need to use taxpayer money wisely–or risk losing their entire company, or at least the bailout. The President should play hardball with AIG-like insistence on contractual obligations – not to satisfy some understandable sentiment or emotion, but to send a signal to the market overall. It may prevent similar contractual obstinacy at other bailout companies. For this reason, the utilitarian consequences (probability*benefits/costs!) are actually much larger than only AIG. The AIG-only counter-example is not consistent with utilitarianism b/c it’s too narrow. We need to have a much broader conception of all social benefits and costs of political, business, etc. decisions – something President Obama knows exceedingly well. Breaking these AIG promises is definitely worth it (but only for someone who does not regard promise-keeping as some absolute obligation that cannot be rescinded). It’s *not* retribution – it’s for the huge symbolic or signalling value. Plus, if these bonus contracts are preserved, wouldn’t taxpayers be more resistant to any other, new bailout package that might be necessary in the future (as some economists already predict)? If you count on those new economy-wide cash infusions (which cannot be passed without taxpayer consent), that consideration, too, is, and should be, part of a comprehensive utilitarian calculus.

  12. Chris MacDonald on

    Anonymous:Your point about symbolic value is a reasonable one. But I think this situation is too nearly unique to serve as much a deterrence. And I think there’s a flip side to the symbolism point: I think it’s symbolically valuable for people in authority to adhere to the letter of the law, and defend the rule of law. Chris.

  13. Anonymous on

    Chris: “And I think there’s a flip side to the symbolism point: I think it’s symbolically valuable for people in authority to adhere to the letter of the law, and defend the rule of law.” Then why was there no moral outrage when internal wage and benefits contracts at Ford, GM, and Chrysler *had* to be renegotiated and the unions had to consent to (some of) these necessary changes? Now, AIG execs and employees will have to rewrite (retroactively and I hope “voluntarily”) their contracts because changed circumstances demand no less. As simple as that. “The law” or the Constitution is not some perfect code that cannot be broken when circumstances have changed drastically. Only people with an irrational adherence to “tradition” or the past would suggest such conservatism. It’s irrational b/c it seems to completely forget that individuals and, in fact, entire social systems can be fallible, self-serving, opportunistic, etc. etc. Because of that possibility, we need to be open to continuous changes and revisions, even if this makes social and business relations a bit less predictable. I observe this odd conservatism and clinging to the past quite often in religious contexts, but it’s pretty rare in political or business contexts. And such conservatism is definitely not good… Thank God Lincoln was willing to abolish or transcend certain contractual relations. If your arguments were true, in 1861-65 wouldn’t US society have had to “honor” the contracts (between slave buyers and slave sellers) that regulated slave-slave owner relations? Of course not! Society made progress and we did away with traditions that were immoral. Wasting taxpayer money on unnecessary and ill-advised exec bonuses is immoral (regardless of the exact $ figure), and we *must* abandon any previous contractual relations that state otherwise. The externality then were the slaves, the externality to these contracts now are the taxpayers (plus a few other stakeholders and future beneficiaries from rescue packages). Dear President, continue to take Lincoln as your inspiration, not this particular blog entry on AIG! lol Only defend the rule of law when the law itself is moral and/or maximizes the overall social good. Cheers, Marc

  14. Chris MacDonald on

    Marc:I don’t know anything about the automotive cases. My vague understanding is that those were renegotiations “going forward,” which is slightly different.And I’m not cleaving to just any old traditions, here. I’m saying we can’t chuck legal protections when we don’t like what they imply in a <>particular<> case. I’d be fine with changing laws to prevent this from happening again. I just don’t like the ad hoc solution.On the general question of whether these contracts really are inviolable, here’s a useful piece that points to a conclusion quite different from mine:http://www.salon.com/opinion/greenwald/2009/03/16/aig/index.htmlRegards,Chris.

  15. Anonymous on

    Thanks for the salon link. I wasn’t aware of that, but, as you could tell, my reaction to Summers’ sanctity-of-contracts arguments (on at least one of the Sunday am political shows) was similar to those of Glenn Greenwald: “absurd.” The political fallout was predictable (Summers in general does not seem to be the most politically astute operator), and the Administration changed its tune within 12-24 hours. Geithner seems to have been pushing for rescission of these contracts all along – but I am not sure Geithner is all that forceful. Barney Frank also gets this one right… I hope it’s more than political posturing. But if Obama wins this one and AIG CEO Libby loses the battle over the bonuses, it will be a good day for America. It will show the party of self-serving big business (made possible by “oh-so-important” cleverly written contracts) is *really* over. Cheers, Marc

  16. Anonymous on

    Further developments: http://news.yahoo.com/s/nm/20090317/ts_nm/us_aighttp://news.yahoo.com/s/ap/aig_cuomooh, and I was referring to CEO Liddy, not Libby… Freudian slip? ;-)Cheers, Marc

  17. Anonymous on

    I agree that there was an agreement. But let them hand the checks over in front of cameras. I want to see which of these execs is morally vacuous. I would decline the money based on the trouble in my nation, and the fact that it had to be borrowed form those same citizens. So let them have their money but have them publicly acknowledge who they are. ~Juanita

  18. Anonymous on

    what a load of nonsense !! lets pretend for a moment that the awesome unfettered growth capatilism of the west was allowed to work the way it is supposed too IE the company is left to fail because of its own lack of forsight and accumen ? would they still be getting a bonus then? or much more likely looking for a new job minus any bonus payment because the company is a smoking crater gone bankrupt. They should be thankful they are not in jail and still have a job unlike the true victims who are joining the swelling unemployment lines. Contractual obligations are voided every minute of every day then renegotiated , if these stellar executives were left to try and get the bonus from the bankrupcy court they would be lucky to get anything at all

  19. Chris MacDonald on

    Anonymous:Please check out *today*’s blog posting to see why breaking the contract is likely to lead to bad outcomes.Also: if criminal charges are in order, I say they should be filed. If not, the contracts (apparently) are valid. We can’t not pay people just because we *think* they’ve done something bad (well, almost certainly SOME of them have done bad things; but almost certainly some of them have not. Why punish THEM?)Chris.

  20. wwhite0028 on

    I agree with what you say on fulfilling a promise but when has that stopped corruption in the past, present, and future? Was there a wink, wink when these promises were made? Good business ethics comes from being a good leader. They should not ask the people they represent to make sacrifices they themselves are not willing to make. I am on the side of integrity and isn’t that what this is really all about as well as ethics? You say “if people are owed bonuses despite having done a lousy job that means a mistake was made when the bonus system was set up” aren’t bonuses supposed to be based on performance? If not then it’s not a bonus it’s payroll. We’re not talking about the best employee at WalMart who may get a $200 bonus at Christmas we’re talking about outrageous sums of money that is coming out of tax payers pockets. Where’s the ethics in accepting that money knowing how much of a financial burden their company has already been? It may be ethical but it sure isn’t moral.

  21. Chris MacDonald on

    Wwhite:

    Thanks for your comment.
    But no, bonuses are not always based on performance. They’re an incentive, sometimes an incentive to stay at a company you’d rather leave. That’s what kind of bonuses they were in this case.

    Chris.

  22. […] looseness of use of that word in the realm of finance is not at all unique. Witness the “bonuses” paid to AIG employees two years ago, which were not in fact performance bonuses at all but rather retention payments […]


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