Iowa Senator Grassley recently said that the AIG executives involved in doling out 165 million in bonuses should apologize and then either quit or commit seppuku, the ancient Japanese ritual suicide. I will discuss the bonuses more in a moment, but let me say that perhaps Senator Grassley is missing the plank in his own eye while adeptly spotting the speck in the AIG executives' eyes.
Let's say that Senator Grassley is correct, and that those who waste U.S. tax payer money should apologize, and then resign or commit suicide. Senator Grassley was elected to the U.S. Senate in 1981. In those eighteen years, the federal budget deficit and federal debt have soared. Between pork projects and earmark spending, I am confident that the U.S. Senate, Senator Grassley included, has wasted U.S. tax payer dollars in ways that AIG executives could never match.
Maybe the AIG executives should do the honorable thing and pay the ultimate price for their wastefulness. I actually like the idea. Perhaps though, they should wait for Senator Grassley and his colleagues to lead by example. Lead the way Senator Seppuku.
As far as the bonuses paid by AIG, I do not think its as simple as a lot of people want to make it. Believe me when I say that I turn a shade of red when I hear that a company is paying out large bonuses after being saved by a government bailout. I've heard radio talk show hosts defend the bonuses, implying that these are all contractually required bonuses, and that the company is legally obligated to pay them.
Let's break the bonuses down into two broad categories, obligatory and discretionary. An obligatory bonus would be one that is specified in an employment contract. For example, if Senior VP Jones meets the ten specified terms of the contract, he receives a bonus of $500,000. A discretionary bonus is one that is not in a contract, but is given to reward an employee for individual or company performance, or the popular "retention" bonuses.
Generally speaking, discretionary bonuses should not be given out by companies that need to be bailed out by the federal government. Retention bonuses, payments to keep these key people seem particularly outrageous. These "key" individuals performed so well that they not only nearly bankrupt their own company, but threatened the economic well being of the U.S. economy. I can see why you wouldn't want those people to get away.
Some people argue that the problems with AIG were all in the credit swap business, and that other areas were profitable. Why shouldn't people who performed well in those parts of the business be rewarded? Afterall, they did their jobs well and had nothing to do with the problems. The reason you do not pay them discretionary bonuses is that the company failed. Were it not for the threat that AIG's collapse could severely damage the U.S. economy, AIG would be no more, and they would receive no bonuses.
Unfortunately, obligatory bonuses probably do need to be paid. The company is still a functioning entity and continues to have legal obligations. Its satisfying to say "screw them", but the same argument could be made for paying a lot of other bills.
I'm not sure how much of the bonuses are obligatory and how much are discretionary. The news has really not discussed it in those terms, as its much better to talk about a bigger number. My guess is that a lot of the bonuses are discretionary, but I could be mistaken.
The real problem is executive pay. I'm not very comfortable with the government deciding how much people should make. Truthfully, there are a lot of people in the Congress who are not very smart. Many are much more adept at running their mouths than they ever would be a business.
I think the real problems are the board of directors. In some ways its the foxes guarding the hen houses. Executives of Company A sit on the board of Company B, whose executives sit on the board of Company C, etc. These board members do not have an incentive to keep executive pay low. They have every incentive to inflate executive pay. If the executives of Company A now make twenty-five percent more, then Company B will have to match, as will Company C. Its not quite as crass as the U.S. Congress voting itself a pay raise, but its a difference in degree rather than in kind.
There needs to be more Board of Director accountability to stockholders. There need to be some changes that make it easier for stockholders to challenge and replace a board of directors. Right now it can be extremely difficult to effectuate change. Part of the reason is that large chunks of stock are controlled by mutual funds and pensions, entities that are really not inclined to rock the boat. I think that those groups tend to go along with the current board, which makes changing members even more difficult. I'm not certain how the rules need to be changed, but they do.
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