Bonus Boondoggle

Posted March 19, 2009, at 6:36 p.m.

Congress, the media and the public have in recent days vented their frustration over the bonuses AIG paid to its executives. Much of the anger has centered on the fact that the company took government bailout money and turned around and handed $165 million to top executives. A deeper problem, and one far from limited to AIG, is that the same people who ruined the company are now being rewarded financially.

As the majority of Americans likely understand it, a bonus is meant for a job well done. Managing a company so badly that it needs a government bailout so it doesn’t go out of business doesn’t look like a job well done. Ditto for the huge bonuses paid to the heads of Merrill Lynch last year when the company lost $28 billion.

John Mahon, dean of the University of Maine College of Business, points to the rapid growth of the financial and technology industries in the 1990s as the time when the link between a bonus and a job well done was broken. Now, people expect a bonus for showing up, he says.

In fact, the bonuses in question at AIG were for retention. The additional pay was necessary to ensure that key employees didn’t leave the company at a perilous time, the company argued. It is hard to understand how people who made so many bad decisions were so valuable, and, worse, many of them have since left, eroding this argument.

Retention bonuses and other lucrative contract provisions that have nothing to do with success or failure aren’t limited to Wall Street firms.

The University of Maine System paid former Chancellor Joseph Westphal hundreds of thousands of dollars after he stepped down amid controversy over his plans to remake the system. He was guaranteed a sabbatical and teaching job despite his uneven record as chancellor.

The University of Maine continued to pay former women’s basketball coach Ann McInerney for a year after she resigned and publicly apologized after she allegedly lied to police during an early morning traffic stop. She was paid the $100,000 although her contract stipulated that she not embarrass the university.

Recruiters argue that such provisions to pay people after they leave jobs, to guarantee them other jobs if the one they were hired for didn’t work out, or to pay bonuses if they stay on the job are necessary to attract and retain the best talent.

The AIG situation along with these other examples show it is past time to return to an era where the value of an executive, a coach or a laborer was determined by the quality of the work they did, not by the language of a contract signed before they even started the job.

A good place to start would be for shareholders to demand that companies provide them the criteria for awarding incentives and that corporate boards hold employees to these standards before handing out bonuses.

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