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Author Topic: Why the outrage against AIG bonuses is misguided
Tresopax
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"Dear AIG, I Quit"

quote:
DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

Since this recession has begun, there have been a whole lot of people outraged at things they don't really understand - and that includes a lot of elected officials. First there was the general outrage against any kind of bailout by those who really didn't realize why a bailout would be needed (only to reverse positions days later when the stock market dropped.) Then there's been the outrage against the fact that the stimulus package hasn't made the stock market or economy rebound yet, when I think most economists would agree no stimulus package could work that quickly. And now there's the AIG bonuses...

If you want to save a company in distress, you need good managers who know what they are doing. If you want those sort of employees, you have to pay them the market value for their efforts, otherwise they are going to go work at a company that isn't being attacked by the media and is willing to pay them significantly more. That's economic reality. The end result of the government's crusade against AIG bonuses is going to be the loss of good employees at AIG, which means AIG is going to have a harder time getting fixed, which probably means the tax payers will end up paying more money to bail it out.

Like the employee quitting in the link above, most employees at the company who are getting bonuses are not in the particular section of the company that caused all the trouble. There's no justice being served by punishing them. I think that's the reason why these bonuses were allowed in the first place - the people who understand how AIG works realized it was the correct decision. I just would prefer they'd come out and say it, rather than bowing to populist dissent.

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kmbboots
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There are lots of people in lots of industries that had nothing to do with the crisis that are giving up bonuses, raises, even jobs because the companies they work for can't afford it. If a company has to be bailed out by the tax payers, clearly they can't afford to give out huge bonuses.

If the guy is so indispensable, surely he will be able to get a job at a company that can afford him.

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Scott R
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kmboots:

In other words, "Get a job, ya bum!"

??

The man had a contract; AIG honored the contract. Congress even, honored the contract when they gave the first of the bailout money. But when the public outcry started, they reneged.

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MattP
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A retention bonus is part of a normal compensation package. It says "we agree to pay you X, if you agree to work until a specified date or until this task is complete." Taking away that sort of bonus is equivalent to just arbitrarily taking away a fraction of someone's salary.

I have a feeling that there would be less support for a law that proposed a 90% tax on, say, every dollar over $100K in an individual's base salary.

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twinky
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quote:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
Indeed they have.
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Mucus
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quote:
Originally posted by Tresopax:
... If you want to save a company in distress, you need good managers who know what they are doing. If you want those sort of employees, you have to pay them the market value for their efforts ...

"If"

See, a lot of people don't really think that they should be saving companies in distress, period, particularly financial ones. The ones that are against the bonuses are often in this category, so that line of reasoning will be less than effective.

Secondly, the "market value" for this type of employee has dropped significantly, hiring even in areas such as Canada or Asia which have been less affected has nonetheless slowed (and still has to absorb a high number of ex-pats which were working in the US and are now coming home). Hiring in Europe, especially in London is dramatically down. As for the US, the only reason this "market value" exists is due to the government bailouts in the first place, otherwise these companies would have collapsed quite a while ago. So in a way, its fairly counterproductive to complain about the government curtailing bonuses when the only reason even a base salary exists is due to government intervention in the first place.

So personally, I wouldn't lose too much sleep over this issue. (Or rather, your lines of reasoning don't really bother people who don't necessarily share both of your "if"s)

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Mucus
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Here's an example, and this was in 2008:
quote:
All across Bay Street, firms are using the downturn to bring aboard coveted bankers at wages that would have been unheard of even a year ago.

Gone are the days of guaranteeing bonuses to poach staff from rival firms. Now, workers who have been laid off or are worried about that fate can be had for a relative pittance.

They are given a base salary and any extra bonus compensation is closely tied to the business they generate.

Even base salaries are dropping. Both Canaccord and Thomas Weisel followed rival GMP Securities and cut base pay for senior workers by 10 per cent or more.

“It's a buyers' market, the same as real estate,” said Brent Ludwig, who runs Ludwig Financial Recruitment in Calgary. “No guarantees, but some special deals are being cut along the lines of ‘eat what you kill' in order to lure top producers.”

link
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fugu13
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This was a person involved in unwinding AIG's positions. Most of the company is gradually closing down. It is unlikely AIG will be able to hire competent people to close down their operations if they lose the ones they have, who they're already having problems keeping around (such as this guy).

Many of these people already had job offers, and were looking at leaving to take them. I suspect getting rid of the bonuses (and thus the competent employees) will end up costing the gov't more in money they would have recouped from profitable parts of AIG (such as the one this guy worked for) than it "saved" in bonuses. After all, the bonuses only totaled a hundred odd million, and the activities of these business areas are much larger than that, even now; their sale prices will be far larger.

kmbboots: did you read the letter? The guy isn't worried at all about getting a job, he's insulted at how he's been treated, and he should be. He did an excellent job in his position, was promised a lump sum payment in exchange for staying around instead of quitting earlier, and then had the gov't yank that out from under him. The real fun is, he was the guy with the expertise to unwind his division's position, so in exchange for shorting him a payment AIG had contractually agreed to make, they're going to end up with the short end of the stick when they try to sell his division, because they won't have anyone who knows it.

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The Rabbit
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I think part of the problem is that very few people understand the reward model that is used by these companies. I'm skeptical of the $1 salary, but I do know that people in this industry typically have very low base salaries and receive most of their remuneration (often > 90%) in the form of "bonuses". I have no idea why the financial market has adopted this strategy, but it seems to be typical. My guess is that even with the bonuses, many of these employees are looking at a very significant pay cut over last year.

Most people tend to see a "bonus" as something that is a reward for extraordinary performance (both for the individual and the company). Most of us have never worked for a company that gave any kind of bonus. But in the financial industry, bonuses are the lions share of what people get paid, kind of like tips for waiters. Once people understand that if waiters don't get tipped, they essentially don't get paid they are much more willing to tip for average or even substandard service. I think if people understood the pay model used in the financial sector they would likewise be more willing to accept giving some bonus even for average or substandard work. I think the public would be far more sympathetic if it were presented in terms of total remuneration rather than just bonuses. If it were reported that AIG financial group employees on the average were paid (salary and bonuses) x% less this year than in the preceeding 5 years, people would be far more likely to accept this as fair.

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ElJay
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Kate, you should read the entire letter. It's very interesting. Nowhere does he claim he's indispensible. He does point out that his division has been profitable, and that the people working for him have been working hard to help save the company through profitability and passed up opportunities to go to more stable companies after being repeatedly reassured that they would be compensated for the time they were putting in.
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fugu13
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These aren't typical financial sector bonuses, these are retention bonuses, which are common when needing employees to stay on in order to wind down and sell off businesses. As far as I know, AIG stopped giving out all other sorts of bonuses (including performance bonuses, even for people who are still bringing in money, as some parts of AIG are) when they collapsed.
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Mucus
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Again, I don't think arguing that AIG might get a bad deal selling this division without this guy will be an argument that will be all that convincing to people that would prefer AIG receive no bailouts and fail in the first place.
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scifibum
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Mucus, you seem to be arguing a different point than the question of whether the "bonus" payments are justified, or deserving of outrage.
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kmbboots
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I am not claiming that what happened to that guy was fair. It isn't.

What is happening to people all over the place isn't fair either. Through no fault of theirs, the companies they work for can no longer afford to pay them. Should they be insulted at how they are treated? They pretty much have to deal with it and most of them won't have been earning anywhere near what this guy has been earning in the years running up to this.

And if he is as good at what he does as people here (not him) are claiming, he should be in better shape to get another job.

So, yeah, there are a lot of other people I am going to worry about first.

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Shmuel
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quote:
Originally posted by Mucus:
Again, I don't think arguing that AIG might get a bad deal selling this division without this guy will be an argument that will be all that convincing to people that would prefer AIG receive no bailouts and fail in the first place.

Given that the government essentially owns AIG at this point, I think that particular ship has sailed. Whether it should have set out in the first place is a lovely academic question, but I don't think it has much bearing on what to do with the situation as it now stands.
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natural_mystic
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quote:
Originally posted by The Rabbit:
I think part of the problem is that very few people understand the reward model that is used by these companies. I'm skeptical of the $1 salary, but I do know that people in this industry typically have very low base salaries and receive most of their remuneration (often > 90%) in the form of "bonuses". I have no idea why the financial market has adopted this strategy, but it seems to be typical.

I recall reading that the salary structure is as it is because salaries over a certain (large, but not hugely so) amount are not tax deductible for the company, but bonuses are.
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Mucus
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Shmuel: You don't. But I 'd bet that to a lot of the people that are actually angry about the bonuses, it does. Throwing good money after bad, and so forth.
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Strider
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I think that maybe if someone(the government, AIG) attempted to inform the public that while yes, these are large bonuses, they were retention bonuses and the people getting them were paid dollar salaries over the last year in exchange for them, there might have been much less of a public outcry. Like some have mentioned, people hear "bonuses" and assume it's extra money, over and above their normal high salaries. At no point did I hear of anyone trying to correct this misunderstanding and I'm not sure why.
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orlox
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If this had been an FDIC regulated failure, he would have been dismissed as a matter of routine and a team of forensic accountants would have determined if he was blameless. At this stage, we only have his word as he has spent the last year unwinding the evidence that could have backed up his innocence.

The more complex and inscrutable these CDOs were, the more justification that those who even appear to be involved should not be the people to unwind them.

The assertion that these deals could only be understood by insiders is laughable.

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fugu13
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Innocence? He doesn't even work in anything related to credit default swaps. He works in a totally different area of AIG's operations that has had no problems or suspicions of problems.


Mucus: people feel it is better to avoid paying out bonuses than for the government to get back more of the money it has put into it? The government owns AIG. Every time AIG leaves a few billion dollars on the table, the government leaves a few billion dollars on the table. Even if you feel AIG should be allowed to fail (and I do, and quicker), I would hope people wouldn't want it to be chopped up by incompetents who cost the taxpayers even more money. I think most people who are agitated about these bonuses are agitated because they've been incited by incorrect ideas about what they are, and I think that view is well supported by the lack of outrage about them for a long while after they'd been publicly announced.

kmbboots: even if you aren't worried about him, you should be worried about the government losing even more money over AIG. And it isn't like this is some random unfair thing. This is an unfair thing being perpetrated on your behalf against him.

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orlox
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He is the Executive Vice President of AIGFP, the 400 person division that caused all the problems. Although the Equity division may not have been directly involved in the CDOs, it certainly was involved and affected by the loss of triple A status. Even if you were to accept that CDOs were a legitimate instrument, their continued sale even after AIG lost its rating is at least reckless and irresponsible if not criminal. Then the issue becomes not just if he was involved in the sales but what he knew and when he knew it. Regardless, I would be much more reassured if an independent body made that determination.
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Mucus
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orlox: Exactly. There's definitely an element of "letting the fox guard the henhouse" sentiment going on here.

fugu13: I think there's many people that think these people are incompetents that *can't* yield more for the government than their bonuses are worth and thats assuming that he has good intentions.

Add to that perception, when the whole financial industry is under a haze of suspicion for lying and defrauding, I think people are much less likely to trust this individuals own word as to whether he's innocent or not. In fact, at this juncture, I'd bet that many people would rather the government literally burn $1 rather than give $1 to someone that may even possibly be guilty of causing the financial crisis, out of spite.

Frankly, I don't think people's lack of outrage about bonuses at the time of the initial bailout is all that indicative of anything except that the relatively small size of the bonuses got lost by the very many other things for people to get excited about at the time.

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kmbboots
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And "relatively small" is part of the problem. What is considered a relatively small bonus is a huge amount of money to most people. His one year bonus - which he can afford to donate to charity* - is roughly what I make after taxes in 20 years.

I think this outrage is at least as much about the bloated compensation that has been going on for years as it is about these particular bonuses.

*Which is lovely of him, but the point is that he can afford to give away what for some people is more than they will make in a lifetime of working.


ETA: I did the math. Make that roughly 23 years. And I am doing pretty well compared to a lot of people.

[ March 25, 2009, 04:11 PM: Message edited by: kmbboots ]

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Darth_Mauve
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Asking an executive to give up his 7 figure bonus is some how the ultimate in contract breaking while asking an automotive worker to surrender large parts of their hard earned retirement after 20 years of contractual agreements is just fair business. After all the car companies are loosing money, as compared to AIG.
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fugu13
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orlox: the equity division had nothing to do with AIG losing triple A status. It was affected by it, but so were millions of other people around the world.

Also, you seem to be confused as to what AIG did. AIG never had any CDOs (at least not as any significant part of their business), AIG made Credit Default Swaps (CDSs) on other people's CDOs. The equity division had absolutely nothing to do with CDSs (unsurprising, since they aren't anything like equities). And AIG hasn't been selling CDSs since (at least on a big scale, they might have become involved in some to offset risks on others), but they're still contractually obligated to participate in the CDSs they're involved in. The guy who you're slamming as possibly guilty is entirely unrelated to that activity. He was not involved in sales of CDSs (or CDOs, even if AIG had been in that business). He was involved in sales of equities, including index funds, and that part of AIG's business was conducted in a normal and scandal-less manner.

A side comment: executive VP doesn't mean you have any particular say in the running of the overall thing you're executive VP of, especially in the financial sector, it just means you control some sub-unit of it (usually, and in this case).

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fugu13
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Darth_Mauve: AIG is going out of business, and in order to make sure taxpayers are paid back some of their money a small set of employees were promised a retention payment at a certain time, if they hadn't quit, so they wouldn't quit. None of the top executives (top 60, I believe) were given a retention payment. Many of the people receiving retention payments weren't executives at all.

Many other bonuses typically part of financial company compensation were not handed out at all. It isn't like AIG employees are being paid the same as they were before.

And if the automotive companies would like to be taken over by the government with the intent of ceasing to exist, I'm sure that can be arranged.

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Jhai
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http://meganmcardle.theatlantic.com/archives/2009/03/institutional_investment.php
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ClaudiaTherese
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How is a bonus different from a salary, then? (Honest question.) I would have expected that institutions might be taxed differently on salaries versus bonuses in part because bonuses were not guaranteed, but salaries were. However, if these were to be guaranteed payments, how are they properly termed bonuses instead of salaries?

[It seems from a marginally informed perspective that the only reason these institutions could give such large bonuses is that they weren't taxed as salaries, even if they effectively were salaries--again, assuming they were to be guaranteed payments, which doesn't jive with my understanding of what a "bonus" is. But admittedly I am rather in the dark about all this.]

---

Interesting discussion. Thanks for the information. Like many, I suppose, I was unaware that there was something going on with a base salary of $1/year but a (guaranteed?) bonus of millions (that would go untaxed for the institution?).

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MattP
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Bonuses are not taxed diffently from salary. When paid out they tend to withold at the capital gains rate because there is a risk that a discretionary bonus will change someone's tax bracket, but when tax time comes bonus income is not distinguishable from salary income.*

quote:
assuming they were to be guaranteed payments, which doesn't jive with my understanding of what a "bonus" is
Retention bonuses are guaranteed income. Don't get too hung up on the term "bonus". This is a big part of this problem - they don't deserve a "bonus"! If they were being paid "retention fees" or a "deferred salary" I doubt there would be nearly as much uproar.

*EDIT: That's for the individual. I don't know if there are tax implications for the institution.

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fugu13
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CT: most of the recipients were up for retention payments of a few hundred thousand at most. Only a few of the most experienced were up for millions (and, by the standards of the industry, even now, low millions -- I think the highest amount would be $4 million).
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ClaudiaTherese
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quote:
Originally posted by MattP:
This is a big part of this problem - they don't deserve a "bonus"! If they were being paid "retention fees" or a "deferred salary" I doubt there would be nearly as much uproar.

Understood and agreed. But,

quote:
*EDIT: That's for the individual. I don't know if there are tax implications for the institution.
... this is what I was questioning, and this is why:

quote:
Originally posted by ClaudiaTherese:
[It seems from a marginally informed perspective that the only reason these institutions could give such large bonuses is that they weren't taxed [on the institution] as salaries, even if they effectively were salaries...

That is, I suppose my real question is, was there anything about the way the payments were classified that enabled them to be bigger than a typical standard salary classification (i.e., either directly, or even indirectly--such as if the institution didn't have to pay the same tax rate on them, and thus had more money to give out in the payments)?

And if yes, was that predicated in any way on the element of not being guaranteed in same way a standard salary would be?

---

I realise these are moot questions at this point. I'm just interested in understanding better the ins-and-outs of how it all came through.

[ March 25, 2009, 05:05 PM: Message edited by: ClaudiaTherese ]

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ClaudiaTherese
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quote:
Originally posted by fugu13:
CT: most of the recipients were up for retention payments of a few hundred thousand at most. Only a few of the most experienced were up for millions (and, by the standards of the industry, even now, low millions -- I think the highest amount would be $4 million).

Okay, that's good to know. I'm still curious as to what the benefit as to classifying these not as typical salaries--if they were supposed to be guaranteed payments--and if that might have affected the size of the payments that could have been promised.

Thanks!

---

Added: This is why I am asking:

quote:
Originally posted by natural_mystic:
quote:
Originally posted by The Rabbit:
I think part of the problem is that very few people understand the reward model that is used by these companies. I'm skeptical of the $1 salary, but I do know that people in this industry typically have very low base salaries and receive most of their remuneration (often > 90%) in the form of "bonuses". I have no idea why the financial market has adopted this strategy, but it seems to be typical.

I recall reading that the salary structure is as it is because salaries over a certain (large, but not hugely so) amount are not tax deductible for the company, but bonuses are.

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orlox
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fugu: I did swap my acronyms. However, the point remains, once we get around to regulating these activities failures like this will result in something that looks more like a FDIC takeover than what we are seeing now. For very good reasons.
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fugu13
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They were only guaranteed them if they were still employed at certain dates (nearly a year after the offer, and then a year after the first date, I believe). So, if they quit before the bonus was handed over, they would receive no bonus. The reason was to provide an incentive to stay at AIG long enough to wrap up business.

As far as I know, there was no particular institutional tax benefit to doing so, and I doubt it would have been a big part of the decision-making process. $165 million is a tiny, tiny portion of even just the amounts the government has put into AIG, before we take into account the huge cash flows that still pass through AIG's hands. The amount in taxes they might save is even smaller, and given how much money they're losing I doubt they're paying much in taxes, anyways (plus, since the government is the organization propping them up, they really just aren't paying institutional taxes -- if they paid some money they'd end up needing, the gov't would hand it back).

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fugu13
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orlox: I'm sorry for being confused about your point, but I had thought you were trying to lay blame on employees like the one sending the letter for CDSs, losing the AAA rating, et cetera, not just saying that until CDSs are regulated failures can't look like FDIC takeovers.
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orlox
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I don't know if the guy is innocent, I suspect he probably is. But it sure LOOKS bad and the appearance of fairness is probably as important as actual fairness.

Of course, there was no mechanism in place to handle this but it SHOULD have looked more like FDIC process than a merger process, which is what this looks like.

I do agree that the bonus issue should only rate about 1% of our concern but in the context of an ex-Goldman Sachs guy handing AIG to another Goldman guy and then paying off billions of taxpayer dollars to Goldman Sachs this issue does speak to the larger.

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ClaudiaTherese
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quote:
Originally posted by fugu13:
They were only guaranteed them if they were still employed at certain dates (nearly a year after the offer, and then a year after the first date, I believe). So, if they quit before the bonus was handed over, they would receive no bonus.

That sounds an awful lot like a "salary." [Confused] Effectively, I mean: "if you are still working here, you get paid 'x,' but if you are not, you get nothing."

quote:
Originally posted by fugu13:
As far as I know, there was no particular institutional tax benefit to doing so, and I doubt it would have been a big part of the decision-making process.

It seems so odd, then, that a nominal salary (not just a low base salary, but a nominal one) but the bulk of income scheduled to come through bonuses is such an industry standard.

quote:
$165 million is a tiny, tiny portion of even just the amounts the government has put into AIG, before we take into account the huge cash flows that still pass through AIG's hands. The amount in taxes they might save is even smaller, and given how much money they're losing I doubt they're paying much in taxes, anyways (plus, since the government is the organization propping them up, they really just aren't paying institutional taxes -- if they paid some money they'd end up needing, the gov't would hand it back).

Yeah,that makes sense.

I'm not so much interested in how the details of this particular tempest played out, but more in the general structuring of the financial industry in which this happened to play out.

It seems (and I emphasize "seems" here, as it is far from my field) to me that there was a common practice of classifying the bulk of remuneration as bonus rather than salary, and I wonder what drove that practice. Obviously bonuses could be tied to performance, but then again, the "performance" we're talking about (for some of those involved) has turned out to be more sham or fancy footwork shellgame stuff than real profit.

I wonder if that general pattern of remuneration is worth looking at more closely as businesses are restructured. If there also is tax incentive to remunerate by bonus rather than base salary, then maybe that should be looked at as a justifiable way to discourage the industry practice. If warranted, of course.

[ March 25, 2009, 06:40 PM: Message edited by: ClaudiaTherese ]

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ClaudiaTherese
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quote:
Originally posted by ClaudiaTherese:
That sounds an awful lot like a "salary." [Confused] Effectively, I mean: "if you are still working here, you get paid 'x,' but if you are not, you get nothing."

By the way, I understand it isn't salary. I'm just saying it seems to function as a salary would, and I raise it in light of the rest of my post. That's all.

I'm also not suggesting these retention payments shouldn't have been paid. Again, I am wondering about the basic structuring of transactions within the industry itself moreso than anything else.

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Jhai
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So you don't get paid anything until the end of the year at your job? And then you only get your paycheck for the year if you're still with the company at the end of the year? [Smile]
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ClaudiaTherese
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quote:
Originally posted by Jhai:
So you don't get paid anything until the end of the year at your job? And then you only get your paycheck for the year if you're still with the company at the end of the year? [Smile]

[effectively != identically]

I'm talking in context of a particular part of the discussion, Jhai. I'm speaking of functionality with respect to taxability on the institution, not how the money is treated or perceived once received by the individual.

I appreciate the smilie ( [Smile] ), but I'm quite hesitant to engage in another discussion if it is via even tongue-in-cheek challenging remarks. fugu and MattP have been awesome and understanding, and very patient. That isn't to say you aren't playing fair! Just that I'm struggling to understand a part of this thing that I've never examined before, and my attention doesn't stretch that far without splintering.

Also, I've been crabby of late, and isolated short-question responses to my posts have never gone into my well-received pile (ask poor beleagured Porter), so I can't imagine I'd treat you with the grace you deserve. Forgive me from pulling out of that part of the discussion, please.

[ March 25, 2009, 07:35 PM: Message edited by: ClaudiaTherese ]

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fugu13
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CT: with a salary, one usually gets paid over short time intervals. These are lump-sum payments after longer time intervals. Additionally, a salary is due even after partial work. None of these payments are due if the full term is not completed.

To illustrate the difference: imagine you were working somewhere with a normal salary, paid monthly, and quit after six and a half months. You would have already received six months of salary, and would receive an additional half-month after quitting. Now, imagine you were working at AIG when this went into effect (and, say, agreed to take the $1 salary). You quit eleven months later, and you will have received (approximately) $1 in salary, and you will receive no retention payment, despite having worked there for eleven of the twelve months you needed to work there to receive the retention payment.

This isn't a very good way to observe the general functioning of financial industry compensation, because this sort of payment, despite having been labeled with 'bonus', isn't anything like the more traditional bonuses, and also isn't a typical part of compensation packages. The normal financial industry model of compensation is pretty messed up, it has become clear. One of the best suggestions I've seen was someone recently suggesting employees should be given most of their above-and-beyond salary pay in the form of stock options, with similar rules for redemption as stock options given to tech employees. That would alter the incentive structure significantly towards taking actions that benefit the company at least somewhat long term instead of single-year cash flows (especially as the stock options might not even vest until a year or more later).

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ClaudiaTherese
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quote:
Originally posted by fugu13:
This isn't a very good way to observe the general functioning of financial industry compensation, because this sort of payment, despite having been labeled with 'bonus', isn't anything like the more traditional bonuses

I think it does keep coming back to that. There really was a series of errors in the discussion from the beginning. [see post just below this for better wording of this part]

I know you said that as far as you knew, there wasn't a tax difference for the institution, but I've read the same thing as natural mystic: "I recall reading that the salary structure is as it is because salaries over a certain (large, but not hugely so) amount are not tax deductible for the company, but bonuses are."

Of course this is a moot point now, as I've noted before, but I am curious. In part I wonder if that may have played into why this was termed "bonus" in the mass media. It may have been an arbitrarily assigned term by someone on the inside or outside of it, but it may not have been.

quote:
Originally posted by fugu13:
... and also isn't a typical part of compensation packages. The normal financial industry model of compensation is pretty messed up, it has become clear. One of the best suggestions I've seen was someone recently suggesting employees should be given most of their above-and-beyond salary pay in the form of stock options, with similar rules for redemption as stock options given to tech employees. That would alter the incentive structure significantly towards taking actions that benefit the company at least somewhat long term instead of single-year cash flows (especially as the stock options might not even vest until a year or more later).

Thanks for that. Seems most sensible to me.

[ March 25, 2009, 06:36 PM: Message edited by: ClaudiaTherese ]

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ClaudiaTherese
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Ah, just to be absolutely clear:

Y'all, I know that my experience of getting a regular paycheck as the sequential doling out of my year salary would be very different from my experience of getting that as a lump sum at the end of year, and then only if I was there for the full year.

I'm not so confused that I can't tell the difference between those two. [Wink]

I'm trying to compare the instutional end-of-year balance book's experience of paying out a yearly salary doled out in regular payments versus the institutional end-of-year balance book's experience of paying the same amount as a lump sum at the end of the year. And again, this is with regards to tax purposes: taxes which are assessed yearly. I think we are all pretty much in agreement that the retention payments were not really "bonuses." My questions:

Were they going to be treated as bonuses by the institution for tax purposes? And besides, does that or does it not make a difference in the amount of tax paid by the institution?

---

Added: Furthermore, again to be absolutely clear, I make no claims or suggestions that the answers to those questions have anything to do with whether or not those remuneration payments were/are actually owed in full to the expected recipients. You can actually leave the recipients out of my questions, as they are really all about the regulations on the institutions' financial books, not the individuals the institutions had hired.

[ March 25, 2009, 06:41 PM: Message edited by: ClaudiaTherese ]

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natural_mystic
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I mentioned earlier that I had recently read that salaries beyond a certain amount were not deductible and this restriction did not apply to bonuses. Unfortunately I have been unsuccessful in tracking down my source, so take what I say with a grain of salt.
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ClaudiaTherese
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I believe I read it in a Globe and Mail article, and I'm figuring out how to sign in to view that column. The article preview seems to suggest it's there, but there is not a complete sentence quoted from the area I need.

---

Added: I can't get into the Globe Investor right now. However, I've Googled up Nate Silver's (FiveThirtyEight.com) column, Why AIG Paid the "Bonuses" from March 19, and it looks to be a good read.

[ March 25, 2009, 06:53 PM: Message edited by: ClaudiaTherese ]

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fugu13
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Speaking only to AIG, I don't think it really matters how they are taxed. AIG is effectively not taxed, because they are being kept in funds by the government. (I know I noted this before, but it was buried in a paragraph and bears reiterating).

I suspect that tax issues are a small part of what drives bonuses at other financial firms, and may have been what swayed things down that path (to use the language of path-dependency), but that the reason things stay that way is because of the sort of person financial firms attract. Highly driven, type-A people -- in many ways similar to "big law" lawyers -- who are strongly motivated by competition. Putting large parts of compensation in the form of bonuses dependent on short-term measures of performance greatly appeals to such people.

[ March 25, 2009, 07:14 PM: Message edited by: fugu13 ]

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ClaudiaTherese
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quote:
Originally posted by fugu13:
Speaking only to AIG, I don't think it really matters how they are taxed. AIG is effectively not taxed, because they are being kept in funds by the government. (I know I noted this before, but it was buried in a paragraph and bears reiterating).

Yes, they are now effectively not taxed because they are being kept in funds by the government. I'm curious about how this was set up initially; i.e., before the government took over, back when the original switch was made from traditionally incentive-based compensation to a newly guaranteed compensation. (You may not be interested in that question, and that would be fine. I just want to be clear about the question I have been asking, which isn't about how things work now, after it all blew up, but how it was set up before that happened.) [Because, in part, I think that may be how the "bonus" word snuck in, and I'm interested in whether that is correct. I'm also interested in seeing any wrongness in that particular area corrected for future classification of taxable assets in other, non-government-owned, not-AIG institutions.]

quote:
Originally posted by fugu13:
I suspect that tax issues are a small part of what drives bonuses at other financial firms, and may have been what swayed things down that path (to use the language of path-dependency), but that the reason things stay that way is because of the sort of person financial firms attract. Highly drive, type-A people -- in many ways similar to "big law" lawyers -- who are strongly motivated by competition. Putting large parts of compensation in the form of bonuses dependent on short-term measures of performance greatly appeals to such people.

Makes sense. NS goes into this in more detail as well.

---

Added (from the FiveThirtyEight article):

quote:
The thing about these "bonuses", however is that they're not really bonuses, which we usually think of as incentive-based compensation. On the contrary, they are something the opposite of bonuses: they took compensation that had been incentive-based and guaranteed it. It's precisely because that compensation was guaranteed -- not incentive-based -- that it is difficult to undo.

The fundamental issue here what I call asymmetrical agency bias. We as human beings tend to attribute our results to skill when we are performing well, but (bad) luck when we are performing poorly. Thus, AIG was willing to pay its Financial Products employees plenty when their trades were going well (assigning them agency for their profits), but was willing to make plenty of excuses for them ("the severe liquidity crisis", "the effects of rating agency downgrades") once things began to unravel. The employees, likewise, may have felt entitled to some large fraction of the incomes that they had "earned" before, and probably didn't regard themselves as culpable for the losses their trades had begun to take. [bolding was in original article]



[ March 25, 2009, 07:37 PM: Message edited by: ClaudiaTherese ]

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natural_mystic
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quote:
Originally posted by fugu13:
[QB] Speaking only to AIG, I don't think it really matters how they are taxed. AIG is effectively not taxed, because they are being kept in funds by the government.

Amusingly, AIG is currently suing the US government to reclaim some taxes.
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Danlo the Wild
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You get a million dollar bonus for posting the WORST quarter in human history? 62.5$ billion?!?!? how do you lose that much money in 3 months?

"The man had a contract; AIG honored the contract."

Um. And AIG could have honored that bonus without any complaint if they didn't need $200 billion of working people's money.

If the US GOVT didn't bail them out, they'd be out of business. no jobs no bonuses. it's like your mom promising to give you $20 bucks for mowing the lawn. When's shes at the store you burn the house down by throwing matches at gasoline cans.

then when she gets there you say, "You promised me $20. Sorry a deal is deal."

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Danlo the Wild
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quote:
Originally posted by fugu13:


The government owns AIG. E

NO. IT. DOES. NOT.

if the economy was to be FIXED (which it won't be)...

AIG would 'return' to being Private.

Meaning, the LOSSES are the responsibility of the taxpayer....

but if it becomes profitable again, the profits will be privatized.

Fannie and Freddie are 'Government owned' and their profits were privatized. The government doesn't own any of these companies. If so that would mean the GOVT owned all the house titles, which they don't and won't, all those houses are in private hands at pennies on the dollar.

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