Today's Most Popular Video
Mar 16, 2009 10:48 pm US/Central
Good Question: Why Do People Who Fail Get Bonuses?
(WCCO)
President Barack Obama calls it an "outrage." Financial services giant AIG is slated to hand out more than $165 million in bonuses, despite the fact that the company is being bailed out by taxpayers because it was in danger of failing. So how can companies hand out bonuses for failure?
"One might make the case that when a company is doing badly that's when it particularly needs to retain its so-called best performers," said Claire Hill, a University of Minnesota law professor who's taught and researched on the issue of executive compensation.
"Of course, the problem is, it's hard to view these people as terrific performers when the company's performance is so very bad," she added.
AIG has been the beneficiary of more than $170 billion in payments by the U.S. government. Public opinion has galvanized against the company because of the bonuses, with politicians and average people expressing outrage.
According to Hill, the idea of a bonus has morphed over the years.
"Bonus does not mean discretionary. You just might think it would be," she said.
Many bonuses are written into contracts, she said, especially on Wall Street. And often people perceived as being high-talent and in high-demand are issued retention bonuses. Essentially, if you're still showing up for work, you earn a "bonus" payment.
"It's not all about cronies helping cronies," she explained. "We've decided as a company that it cannot fail. What does it take to make it succeed? And the answer is some people who were around who are good at their jobs."
There's no major tax or accounting benefit for companies paying out money in bonus rather than salary, said Hill. But there are reasons for it.
"For one thing maybe they might want to set the amount until later; or they're setting the amount based on some formula that won't be known until later. There might be regulatory reasons or reasons associated with their contract. There might be many, many reasons," she said.
Originally, the idea of the bonus was to incentivize executives to do excellent work. It was the counterbalance to the 1980s trend of paying executives a flat salary regardless of performance.
The problem is the idea of measuring performance is extremely controversial and difficult to execute.
"No one knows how to measure it. We don't know how to measure firm-wide, we don't know how to measure it person-wide," she said. "In reality, you get a variety of mechanisms where the executives still manage to be paid."
(© MMX, CBS Broadcasting Inc. All Rights Reserved.)
Swimsuit Cover Model Forgot To Wear Top
Click to enlarge
Stumble It!
Reporting
