More New Deal Denialist Truth Squadding from Eric Rauchway
Michael Whitney of Service Employees International Union Makes a Catch

AIG Retention Pay

David Leonhardt:

Retention Pay for A.I.G. Workers to Fix Their Mess: "We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury." — Edward Liddy, chief executive, American International Group

Ah, retention pay. It has been one of the great rationales for showering money on chief executives and bankers regardless of how well they are doing their jobs.... In the booming 1990s, companies supposedly had to pay retention bonuses because executives had so many other job opportunities.... Now comes Mr. Liddy, the government-appointed chief of A.I.G., defending multimillion-dollar bonus payments for the people who run the small division that brought down the company. If the government doesn’t let them have their money, they will walk away, Mr. Liddy says, and nobody else will know how to clean up their mess....

Nothing highlights the fiction of performance-based pay quite so well as retention bonuses. It turns out that, at least for chief executives, retention bonuses are almost entirely unnecessary. A few years ago, when the economy was still expanding, I looked into every large company that had changed chief executives over the previous six months. Not a single boss at any of them had left for another job. Such departures are so rare that Booz & Company’s annual study of executive turnover doesn’t even include a category for them. The benefits of the job — the pay, the perks, the gratification that comes from running a company well — are too good to leave, even for a similar job.

The situation is a little different for jobs below the top level, particularly on Wall Street. Surely, if the employees of A.I.G.’s notorious financial products division were to be denied their bonuses — a big chunk of their annual compensation — many might leave. The nub of Mr. Liddy’s argument is that these departures would be a terrible thing. But there are several weaknesses with this argument. The first is that the original explanation for these bonuses was rather different. When they were devised in early 2008, months before the first bailout, as Mr. Liddy’s letter to the government on Saturday explained, “A.I.G. Financial Products was expected to have a significant, ongoing role at A.I.G.” The idea, he said, was to guarantee “a minimum level of pay for both 2008 and 2009.” So the rationale for A.I.G.’s retention bonuses is as malleable as the rationale for chief executives’ bonuses....

The second problem with Mr. Liddy’s argument has to do with Mr. Liddy himself. His defenders have noted that the government brought him out of retirement to fix A.I.G. and that he presumably puts a higher priority on doing a good job than pleasing A.I.G.’s employees.... But he is also a product of the current, broken executive pay system....

Simon Johnson, a former chief economist at the International Monetary Fund, has pointed out that in financial crises, bankers often exaggerate the difficulty of cleaning up their mess. They do so partly to justify their own continued importance and also to fight off calls for a government takeover of banks. In reality, Mr. Johnson says, the mechanics of cleaning up hobbled banks turned out to be fairly straightforward during other recent crises, like the Asian one in the ’90s....

The larger question is how to change the rules on corporate pay to reduce the odds of future crises.... The bonus scandal offers Mr. Obama and Mr. Bernanke a chance to get ahead of the curve — so long as they come up with changes that extend well beyond A.I.G.... Across-the-board caps on pay don’t make sense. But perhaps the government can prevent companies from claiming a corporate tax deduction on any pay above a certain threshold. The current limit, which is $1 million, applies only to base salaries and thus has little meaning. Or perhaps companies can be penalized if they pay bonuses based on short-term profits, as A.I.G., Lehman Brothers and just about every other company recently has. The Fed made a suggestion along these lines recently, but it didn’t do anything more than ask nicely....

Given the damage that’s been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo...

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