In Defense of AIG Bonuses

No, I’m not flip-flopping. I just wanted to make sure you heard a defense from a bonus recipient of American International Group.

In a letter to the CEO of AIG, also published in the New York Times, Jake DeSantis, executive vice president of AIG’s financial products unit, submits his resignation. It’s well-written and puts a personal face on AIG employees recently vilified by politicians, the media, and just about everyone in the country.

Mr. DeSantis wasn’t involved in the credit default swap transactions that brought AIG to its knees. He stayed to help dismantle AIG’s commodity and equity divisions because he was asked to and assured a bonus. He worked for a salary of $1 a year, relying on the promised bonus to equalize his compensation. He feels betrayed by the CEO, politicians and various government officials who put the AIG bailout together (which included the bonuses) but are now running for cover.

Mr. DeSantis will donate his bonus to organizations helping people suffering from the economic downturn. He concedes that he probably made more than he should’ve during AIG’s glory days and, thus, was able to save enough that his family won’t suffer like the average American worker. 

The bonus Mr. DeSantis recently received, after taxes, is $742,006.40. And therein lies the problem. Our economic crisis has made all Americans more aware of what executives have been making over a lengthy period, and that’s a lot more than Mr. DeSantis’ bonus. But most people can’t comprehend being paid $700,000, I don’t care how hard they’ve worked.

There’s much talk about the need to fix a system which allows for such excessive compensation. But I don’t know if it can be fixed. The truth is that the system’s most vocal crtics would take the money if they had the chance.

1. 

   The Wonder Pets says:

   March 26, 2009 at 9:59 am

   The “system which allows for such excessive compensation” is capitalism, freedom, liberty, individual choice, the business judgment rule, etc.

   I don’t want to misread the sentence, but it comes off to me as a statement that anyone who earns $700k or more is getting “excessive” compensation, i.e. making too much money.

   Wealth envy permeates our society. Politicians, mostly liberal, encourage wealth envy. People will get paid what the market will bear for their work and their talent.

   Wealth envy and jealousy aside, what gives anyone the right to determine whether another worker makes too much money? What is the standard there and why on earth would it be applied? Where’s the cut-off? Is it $500k and under is OK, but anything more is too much? Nobody, including the government, should be deciding that DeSantis, you, or me are excessively compensated.

   The issue over excessive compensation is separate and apart from AIG, it’s failure, and the bailout. But, if you want to be specific since the post deals with DeSantis, the facts are that he had no responsibility for AIG’s failure, he did run a consistently profitable division of AIG, and he had a contract that entitled him to that bonus. That contract, and it’s payment provisions were “bought” by the government when they bailed AIG out and became an owner of AIG, and those payments were specifically authorized in the bailout legislation.

   So now when I draft an employment contract for a client hiring a top level executive, what should I tell them? “Hey Client, I’ve drawn up the employment contract just like you wanted. It states you have to pay John Doe a bonus of $X based on performance, profit generation, etc., all the factors you wanted included as a measurement of his worth to the company. But, even if he lives up to those standards, at the time he becomes entitled to the bonus payment you (or someone else outside this company) can just determine that it’s ‘too much’ and that he doesn’t deserve that much for his annual compensation.”

   Take away politics, wealth envy, politcal correctness, and playing to the dumb masses, what is the precedent being set with “excessive compensation”?

   My comments are not meant to be pejorative of John or the original article. I really am just trying to understand the issue, and if I have understood it correctly, why, what the standard is, and who gets to set the standard.
2. 

   John Phillips says:

   March 26, 2009 at 11:04 am

   What a terrific comment! You’ve given all of us a lot to think about, and I’ll respond with some of my thoughts.

   I don’t disagree with the way you describe the system that has more or less set compensation for our society. Though I don’t know that anyone can come up with a better system, our’s is overrated. It’s part of the reason we’re in the mess we’re in. It failed to do what a free market is supposed to do. Our free market isn’t really free. It’s controlled in part by the government and in part by the most wealthy people in the country. If you want to describe that as wealth envy, that’s fine. I prefer to say it’s just a fact.

   Excessive compensation is as difficult to define as a free market or capitalism or any number of terms being thrown around these days. Wherever one draws the line, a very small percentage of our population is being paid excessively, assuming there is such a thing. A $700,000 salary sounds excessive to the dumb masses, who are, by the way, not that dumb. They and their ancesters simply haven’t been lucky enough to hit the big time.

   I think it’s quite reasonable for a free society to honestly debate what’s excessive and whether someone or group in our society should have a say about what is too much or to say there’s nothing that qualifies as being too much. Though no group has been ordained as the arbiter on these issues, we have, in my opinion, a small group that does make those decisions. Arguably, it’s much more problematic that an unofficial group driven mostly by self-interest makes these decisions rather than a representative group that takes the overall well-being of all citizens into account. We are still a republic, after all.

   Mr. DeSantis sounds like a nice guy who’s been lucky enough to have had one helluva run for over a decade. And, of course, there are the even fewer who’ve had an even better run — those making hundreds of millions year over year. And, yes, I think that’s excessive, no matter what measure is used. Wealth envy doesn’t cause the class warfare we’re flirting with right now. Several things cause it, not the least of which is excessive wealth.

   Our system has devolved into what’s tantamount to the monarchy our forebears rebelled against.

   Thanks again for weighing in. I appreciate and respect your point of view. We probably agree about more than we disagree, but disagreement can be a good thing for all sides.

   John
3. 

   The Wonder Pets says:

   March 26, 2009 at 12:43 pm

   Thanks John – I appreciate and respect your comments too.