Bonus Rage

The news has been abuzz for the past couple days with outrage, real and feigned, over the "bonuses" being granted to AIG employees. The practical problem here is that these aren't actually bonuses in the conventional sense. Bonuses are discretionary awards, based on performance, longevity, a desire to retain talent, etc. These payments are contractually guaranteed- the company has to pay them even if it's doing catastrophically poorly and even if the recipients caused the catastrophically poor performance. When a payment is guaranteed, it's not a bonus- it's actually just deferred salary.

This shows the problems that happen when we try to prop these firms up through a government bailout instead of allowing them to go into bankruptcy. In bankruptcy, the "bonuses" would be treated as pre-petition, unsecured debt (money that's owed prior to the firm being in bankruptcy) and odds are the employees would get nothing. Outside of the bankruptcy context, there's no way for the government to actually break these contracts, absent somebody finding a provision in the employees' contracts that cancels bonuses, which to my knowledge nobody has.

There was also no way for AIG to cancel the bonuses or contracts as a prerequisite for receiving bailout money. The employment contracts are between AIG and its employees, and as long as AIG is a going concern it's stuck with them. If they broke the contracts they'd merely be sued by the recipients for breach of contract, and then would have to add attorneys fees for the litigation onto the bonuses they'd almost certainly still have to pay.

Essentially all these "bonuses" are is time-deferred salary. You dont' see anybody getting worked up over the regular salary for AIG employees (which dwarfs the amount spent on "bonuses"). People are mad because they think this is discretionary. The media won't correct this impression because they like to have a villain, and so do grandstanding members of Congress.

Jim Manzi comments on how the drive to get the bonuses back could be cutting off our nose to spite our collective face:

Or is it that many people hate the fact that senior employees of AIG Financial Products (i.e., "the same people who almost destroyed the world financial system") are being paid $100 million in retention bonuses to make sure they stay to unwind these positions? I don't like this any more than anybody else. But as a taxpayer, which is to say, partial owner of AIG, I'm not looking for cosmic justice, I want my equity to retain some value. The aggregate size of AIGFP positions appears to be on the order of $100 billion dollars. $100 million is 0.1% of $100 billion. I don't know if the incremental value that having these guys around to do the unwinding is worth more or less than that, but it's not an inherently crazy idea either. I am confident that Barney Frank is no better a judge of this than I am, even if his incentives were aligned with mine, which they are not.