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March 17, 2009

Retention bonus

A retention bonus is when key staff are offered a bonus in order that they stay with the company. The reason that "retention bonus" is in the news at the moment is because there are such retention bonuses being paid to the executives and traders at AIG who drove the company into the ground. There is outrage at these payments:

New York Attorney General

Andrew Cuomo

said Tuesday that

American International Group Inc.

(AIG) granted retention bonuses of

$1 million

or more to 73 people in its AIG Financial Products subsidiary, including 11 who no longer work at the company.

In a letter to House Financial Services Committee Chairman

Barney Frank

on Tuesday, Cuomo said the top 10 bonus recipients combined received

$42 million

, with the top recipient getting more than

$6.4 million

.

Cuomo has blamed the unit for the insurer's near collapse last year. The attorney general said 11 people who have left the company received retention bonuses of

$1 million

or more, with one person getting

$4.6 million

.

"Again, these payments were all made to individuals in the subsidiary whose performance led to crushing losses and the near failure of AIG," Cuomo said in the letter. "Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing taxpayer bailout. Something is deeply wrong with this outcome."

Well, yes, perhaps so. Perhaps retention bonuses aren't in fact what everyone wants to see happening.

New York Atty. Gen. Andrew M. Cuomo has given American International Group until 4 p.m. EDT today to tell him which employees at the company's financial products unit are getting retention bonus payments -- and which executives negotiated those contracts.

In a letter to AIG Chief Executive Edward Liddy, Cuomo says he has been investigating the insurance giant’s compensation arrangements since the company’s near-collapse last fall, and says he finds it "surprising that you have yet to provide this information."

Maybe Andrew Cuomo is correct about retention bonuses. And maybe he's a politician on the make (while that normally means that he's wrong, per se, it's not an infallible guide). Certainly there's a lot of politicians and a lot of retention bonuses being discussed:

The seven largest retention bonuses in AIG’s financial products’ unit totaled more than $28 million, and 22 people got $2 million or more, according to the letter to Representative Barney Frank, a Massachusetts Democrat and chairman of the House Committee on Financial Services.

And all of this is part of a must do something now about these retention bonuses:

AIG missed a deadline yesterday that was set by New York Attorney General Andrew Cuomo requesting a list of its executives who received part of the millions of dollars in retention bonus compensation the company just handed out. After issuing a subpoena for the information, Cuomo declined to comment on any further action against AIG's Financial Products Retention Plan until a strategy has been mapped out.

But, erm, is Cuomo simply a politician on the make over these retention bonuses? Is it simply unconscionable that taxpayers' money should be spent in such a manner? Or is there some really rather good reason why they are being paid? Can anyone come up wioth a reason why retention bonuses should be paid?

Everyone seems upset by the prospect of banks paying big bonuses. What they’re not asking is: why have banks paid them for so long?
The popular answer is that banks need to attract the best talent.
Yeah, right. Eric Falkenstein and James Kwak provide the real answer. Traders must be bribed not to plunder the firm. If you don’t pay them millions, they’ll sell the banks’ assets cheaply to rival firms for which they then go and work. They are paid fortunes not because they have skill, but because they have power.

Yes, actually, someone can.

Obama is rightly upset about the size of bonuses handed out when banks are getting a federal bailout, but not every bonus is undeserved, so it is not as easy as saying there should be zero bonuses until things are fixed. They key is how close they were to the decision making process. If someone in charge of a complex portfolio has his bonus cut back to zero, implying his future bonuses are also in peril, he has good reason to bolt and start at a new place. Worse, he has an incentive to screw up his portfolio by giving away securities to friends of his on the Street (brokers, other traders he deals with), building up a set of favors for his next position. Once there, the buddies he sold securities to at 72 when they were trading at 78 will remember him.

The biggest point about business that we all have to remember is sunk costs. In one way, it doesn't matter how we got here, we just want to stop it getting any worse. If by paying retention bonuses we stop it getting worse then we should pay those retention bonuses. Doesn't matter what the politicians say, doesn't matter what the mob has to say about those retention bonuses, pay up and save us all money in the longer term.

March 17, 2009 in Finance | Permalink

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Comments

Remeber, Retention bonus is for longevity and not performance

Posted by: Erik | Mar 19, 2009 6:18:10 PM