Growth5 Blog

Thursday, March 26, 2009

What does "bonus" mean? "Pig Pile" Media, & the Importance of Knowing Both Sides of the Story

Please read this resignation letter sent by Jake DeSantis, an executive vice president of A.I.G’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

In the letter, DeSantis explains to his CEO how he was asked to not leave AIG a year ago, to take an annual salary of $1- the rest would be paid out as a "bonus" when the year was over. Feeling loyal to the company, DeSantis signed the "retention contract" with AIG to work thru March 2009. And go to work he did.

Fast forward to March 2009. AIG received bailout money, lots of it. AIG lost money, but its employees were receiving "bonuses" - OUTRAGE!!! The "we are supposed to be providing news 24/7 and we never have enough real news so let's ride something for as long as we can" Pig Pile Media latched on to this "bonus" scandal. Over 20,000 articles to choose from via Google News.

Congress started writing laws directed at these AIG snakes. Attorneys General sprung into action, we will get these crooks!!! [some people thought focusing on .01% of the bailout money was not a good use of these people's time: $165 million in bonuses vs. the trillions already given out...] But AIG lost billions, how can the word "bonus" even come into play. Examples must be made.

One thing we have learned in this process is that "bonus" doesn't mean the same thing to everyone. To most of us it means some extra money for doing a good job at work. In the financial services world, it often means the majority of some one's compensation. Would you call whatever Jake DeSantis makes on top of his $1 annual salary a bonus? Congress does, and they want 90% of it back. The Attorney General of NY does, and he wants it all back.

As the resignation letter explains, the billions lost at AIG was a result of the actions of a handful of people (derivative traders). Most everyone else at AIG was doing their job. Some had contracts that guaranteed they would be paid their "bonuses". If there was a contract, doesn't that according to the traditional definition imply that it's not actually a bonus... guaranteed compensation isn't a bonus, is it?

To make it even more confusing, sometimes in the financial services world the word "bonus" could often be better described as a "commission". The person's job is to bring investments in, or keep managed money in-house, for doing so, a bonus/commission is paid at the end of the year. They have no control over whether the traders/company operators make a profit with that money, their job is to make sure it comes in or stays in. Should they forfeit their commission for placed money if the traders lose a big chunk of it?

If your spouse sells appliances at Sears and is paid a commission on all the appliances she sells, it is understood she will be paid that commission whether the company makes a profit that month/quarter/year or not. This is a similar scenario to how a lot of hard-working people in the financial services industry are paid.

Should the derivatives traders be paid bonuses? Obviously not. Should management at Sears be paid a bonus in a year they lost money, of course not. I think we can all agree the woman selling appliances on the floor, she should be paid what she is owed, regardless.

Tom Hanks stands to make $50 million on "Angels & Demons", the sequel to "The Da Vinci Code". If the studio can't turn a profit on the movie, it is not Tom's fault, he will still get paid. Much like the AIG folks, he has a contract. What if Congress or one of the attorneys general finds out that a lending institution that received bailout money has helped to finance this film. Will they call an emergency session and come up with the Tom Hanks tax of 99%? Will there be outrage? There will not be.

A few reasons why:

1) people can understand the finances behind a movie as a business. Movies are made for an amount of money, they open, money comes in. If more money comes in than was spent, so be it. If not, so be it. If a studio can handle paying Tom Hanks $50 million for a movie, they must think that is what he is worth to make a movie for them so it's their problem to deal with. Plus, Mr. Hanks is hard to get because he has a high perceived value. Financial institutions find, pay and keep their top people in a similar fashion.

2) Most of us know we wouldn't be able to carry the sequel to "The Da Vinci Code" - we can't act, wouldn't know where to begin, and even if we could, we are pretty sure we couldn't "open" a worldwide film and get people to the theatres. Tom Hanks can, so he gets the money.

But I think there is a feeling out there that if we had just picked a different major on our college apps, we could be doing what the people in financial services do, those bonuses in the millions could be ours. So, forget those jerks, they're no better than us, they don't deserve that money.

3) Most people just want someone to blame for how the economy has affected them - and it isn't going to be Forrest Gump, so substantiated or not, we'll stick with the AIG folks for another news cycle or twenty.

I didn't know some of the AIG employees had agreed to $1 annual salaries. Perhaps all of us, (Congress, Law Enforcement, the media included) should take a cue from our (albeit frustrated at the time) President on this topic. When asked during his Tuesday press conference why it had taken him so long to speak about the AIG bonus situation, President Obama replied, "It took us a couple of days because I like to know what I'm talking about before I speak."

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