AIG Bonuses Nothing New
March 18, 2009
The recent bonuses totaling $165 million given out to AIG employees should not have come as a surprise to anyone as they were part of contracts written well over a year ago and are largely the result of legislation passed in the early 1990’s.
While opinion on the matter, from the White House to Congress to Main Street, has been overwhelmingly negative, the rationale of giving the bonuses was simple: it could cost more to not pay them.
Before the financial meltdown occurred, contracts were written for employees at AIG, just like at almost all financial institutions, stating certain payments would be made to the employees for their services. These “bonuses” are really the salaries of the employees due to legislation passed in 1993 limiting the amount of tax deductions companies could claim on payments to their employees. Instead of giving their employees the large salaries they had always received, they now had to reduce those salaries and provide other incentives ranging from bonuses to stock options or other perks in order to make up the difference.
The fact that AIG has crumbled amid the poor choices of some of these employees does not invalidate the contracts that were written in better times, although it certainly would make sense, at least to us at CapitolWatch, if these people were fired for their actions and their contracts cancelled in that fashion.
Had AIG not paid the bonuses that were written into their employees' contracts, they, and by extension the U.S. government (as majority owner of AIG), could have been subject to lawsuits seeking even larger amounts of taxpayer dollars in damages plus would have incurred legal fees in the defense of such suits.
The best option, as has been embraced by CapitolWatch, would have been to NOT bailout this or other financial institutions and let them sink or swim based on their value in the market.
Barring this option, it is the government’s responsibility to know what contracts are outstanding at any organization that it is bailing out and to honor those contracts as long as they are valid. Again, we would have pushed for termination of the people who made the mess (also probably the ones receiving the bonuses), but that’s just our opinion.
In the meantime, contact your elected officials and tell them to look before they leap and consider the ramifications of the legislation they pass; we didn’t get to where we are without an awful lot of their help.