AIG's bonus contract: All pay, no performance

If you've been following the flap over American International Group (AIG) and its use of our tax dollars to pay bonuses, then you might be curious about the terms of the contract between AIG and the employees in its financial products division -- the one that lost so much money that taxpayers have put $170 billion at risk to get 80% of AIG stock.

How much money did this division lose? In 2007, the derivatives it originated, related to toxic real-estate assets, produced a paper loss of $11.5 billion -- the year AIG's financial products employees received $423 million in compensation . In 2008, the year for which the $165 million in bonuses were paid -- the financial products unit generated $28.6 billion in derivatives losses.

Here's the key thing about the contract that generates these bonuses -- it pays $165 million in bonuses based NOT on how much money AIG's financial products division made in 2008 or will make in 2009 or into the future. This contract pays AIG's money-losing financial products division based on how much that unit made in -- 2007. Specifically, the contract pays those folks 2008 compensation totaling 100% of their 2007 compensation for all employees except senior management, who receive 75% of 2007 compensation.

It doesn't matter if they made more money in 2008 or in 2009 or whether they lose $100 billion -- they still get paid the same bonus. And that amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. What are performance standards? I don't know -- but it looks like the people who got the bonus met those standards.

I think this contract is illegal because it was created in a way that tortures the English language. A bonus is supposed to be given for good performance and should be paid from the profits of the business. But if a business loses a record amount of money, there is simply no way that it can be considered to have put in a good performance. And there's no cash from the business from which to pay the bonus.

If by performance standards, the contract implied that tricking the American taxpayer to fork over $170 billion constitutes good performance, then AIG indeed deserves a bonus. But as far as I am concerned, AIG flunked miserably in meeting performance standards -- therefore no bonus is due.

Based on the way it tortures words like 'bonus' and 'performance' the contract must have been created under duress and is therefore invalid. So pay back the bonuses!

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares.

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