American International Group and the Bonus Fiasco

On September 16, 2008 AIG suffered a liquidity crisis following the downgrade of its credit rating. In response, the federal government allotted AIG 85 billion in a bailout to keep the firm afloat in exchange for an equity stake in the company. In a very controversial move, AIG paid out more than 500 million in salaries and bonuses to senior employees after accepting the federal assistance money. This outraged the public, and in turn politicians who attempted to impose a 90% tax on the bonuses. Especially because these bonuses were categorized by AIG as “retention” bonuses and a majority of the recipients were no longer with the firm.

AIG’s predominate problem was that their corporate structure was “pay for performance” but did not allow the executives to have a downside if the risk they took did not pay off. AIG’s system did not reinforce the company’s core values, enhance cohesion and commitment to the goals and objectives of the company, and meet with the organizations overall mission and purpose. This “pay for performance” compensation system also seems to have driven the corporate culture to one in which the name of the game was to look out for yourself, rather than the interest of the firm. In order to address this, I recommend AIG do the following:

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1. Compensation should be linked to drive the Company and Individual Performance.
2. A balance should be reached between Short-Term and Long-Term performance Demands. Incentive compensation should be linked to Company results over the fiscal year. The compensation should be slowly paid as long-term awards that are linked to multi-year performance.
3. Retention of Key Talent, but Protect the Companies Interest. This could be accomplished by including cancellations provisions for bonuses in the employment contracts if the employee leaves for a competitor. Further a claw back provision if the person engages in conduct that is harmful to the company in some way.
4. Eliminate controversial compensation practices that do not appear to be fair and are simply “pay for performance.”
5. Ensure board oversight and governance of the compensation scheme.
6. Increase shareholder say in compensation of executives
7. Ensure transparency in compensation practices and methods of communication between the board and shareholders regarding these practices.

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