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.