Wednesday, March 18, 2009

AIG revisited - when is a bonus not a bonus? When it's a retention plan.

You'll recall how I started my Tuesday post:

I'll be the first to admit that AIG's compensation structure is apparently divorced from reality. A compensation structure is supposed to reward employees who contribute positively to a company's income, and if a division is responsible for unprecedented losses, it's impossible to see how ANYONE in the division should deserve compensation.

When I wrote this, I failed to explicitly state my underlying assumptions behind my statement - namely, that the compensation I was talking about was a bonus.

I am familiar with a bonus structure in which the employee is awarded the bonus based upon multiple factors, including individual accomplishment, division performance, and overall corporate performance. Specifically, the bonus is calculated via a multiplier effect, when several factors are multiplied together, and then multiplied against your salary, to calculate your bonus. Now when you multiply things together, if any of the factors is equal to zero, then you get nothing.

Thus my underlying assumption, based upon the scenario listed above, is that if AIG than optimal performance, one of the multipliers for the bonus formula would be 0, and therefore no one would get a bonus.

Obviously, AIG's compensation structure used a different method of calculation, and I was wondering how these bonuses were calculated.

But perhaps I was misled by the common use of the word "bonus" in descriptions of this issue. What if these bonuses truly weren't bonuses?

I shared my Tuesday post on Google Reader, which resulted in the post showing up in my Empoprises FriendFeed stream. And Stephen Mack (who was, at the time of the comment, known as Stephen O'Mack) said the following:

Part of the problem is the word "bonus," which implies it's awarded for good performance, when the reality is in many cases the bonuses are to be awarded no matter what (or for staying on the job, regardless of performance). I bet we'll see different terminology (such as "retention compensation") and pay practices in the future, where more will be rolled into salary instead of bonuses.

So what exactly is the AIG plan? First off, at least according to Andrew Cuomo, it's not a bonus plan per se. Here's an excerpt from Cuomo's Monday letter:

We were disturbed to learn over the weekend of AIG's plans to pay millions of dollars to members of the Financial Products subsidiary through its Financial Products Retention Plan. Financial Products was, of course, the division of AIG that led to its meltdown and the huge infusion of taxpayer funds to save the firm. Previously, AIG had agreed at our request to make no payments out of its $600 million Financial Products deferred compensation pool.

So you can see that the plan is referred to with the words "retention" and "deferred compensation." Initially, I was unable to locate any other details about AIG's Financial Products Retention plan, although presumably people in New York's state government and the U.S. Federal government have an understanding of the plan.

So I took a look at some other entity's deferred compensation plan. Let's look at, for example...the State of New York itself:

The New York State Deferred Compensation Plan (the "Plan") is a State sponsored voluntary retirement savings plan that is offered to State employees and employees of approximately 880 local government jurisdictions that have adopted the Plan. Its mission is to help State and local public employees achieve their retirement savings goals by providing high quality, cost effective investment products, investment educational programs and related services.

After doing a bit more search, however, I found some documentation on the AIG plan via Fox Business.

AIGFP Employee Retention Plan

Here's a quote from the first page of the plan, courtesy Empty Wheel.

In the first quarter of 2008, AIGFP adopted a retention plan for about 400 employees that provided guaranteed payments to employees if they worked through specified payment dates (or either resigned for good reason or was terminated without cause before the relevant dates). At the time, AIGFP was expected to have a valuable, on-going role at AIG. The plan was implemented because there was a significant risk of departures among employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders.

AIGFP, by the way, stands for American Investment Group Financial Products.

So, while the language above isn't the true language of the plan, a few things become clear:
  • The purpose of the plan was to retain people who were, at the time, identified as key people who were critical to AIG's success.

  • For whatever reason, AIG decided that it was so critical to retain these people that they would get paid for staying, and possibly even get paid if the left (provided they didn't leave for cause).
What this means is that the only way that someone wouldn't get the retention money - or what has been called a bonus - would be if they were terminated WITH cause.

And before you exclaim that AIG was filled with a bunch of conniving crooks anyway, remember that any employee that is terminated with cause may have some avenues to contest the termination - something that could take months, or years.

So now I understand this a bit better. AIG was willing to do almost anything to keep these people back when times are good, and at least presently isn't able, or willing, to abrogate the agreement when times are bad.

But what would happen to the agreement if AIG were to land in bankruptcy court? Would its obligations to pay these "bonuses" cease?
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