The Bright Side of Big Bonuses

bonus

Anger, rage, hatred and even death threats -- all over bonuses.

More outrage has poured out over executive bonuses than probably any other issue since the recession started more than a year ago. As American families lose their homes and jobs, and watch their retirement savings disappear, millions of dollars have been paid out to the very people some blame for causing the mess.

The latest target is the American International Group, or AIG, which just paid $165 million to a unit that led to the company's collapse.

But several experts say that bonuses themselves should not be attacked -- but rather the reasons they are paid out.

They say bonuses are a legitimate form of compensation that motivates workers to do their best and ultimately make a company profitable.

"You have to incentivize people. But you have to incentivize them so that there is pay for performance," said Benjamin W. Heineman, Jr., the former general counsel for General Electric and now a senior fellow at Harvard's schools of law and government.

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In AIG's case: "They cannot explain the inexplicable," Heineman said. "It's so counterintuitive that you would give bonuses to people who killed the company."

But generally, he said, "You do want people to produce. You do want to differentiate between employees."

"If you give everybody a flat salary, they might not have any incentive for them to do well," Heineman added.

Many major companies, law firms and banks pay some workers bonuses for doing good work. Even discounter Wal-Mart, the world's largest retailer, handed out bonuses this year.

Wal-Mart announced Thursday that it paid out $933.6 million in bonuses and $788.8 million in profit sharing and 401(k) contributions.

Bonuses are based on individual store performance and are awarded based on the level of the employee in the organization. There are almost 1 million employees who took a part of the $933.6 million. While some clearly received more than others, the average would be just under $1,000 total.

Last year, Wal-Mart paid out $636 million in bonuses, so this year saw a 47 percent increase.

Granted, Wal-Mart is very different than AIG: It has a very profitable 2008 and it didn't take any taxpayer money to help it out.

Reforming Wall Street

The problem with Wall Street today, he said, is that workers get "a huge bonus based on revenues having nothing to do with whether the loans, deals, the instruments created economic value as opposed to just paper churn."

Heineman said that bonuses need to be structured in a staggered fashion so that a company has time to see if a deal helps its bottom line one, three or five years down the road. That means changing bonuses to a mix of immediate cash, stock and delayed compensation.

Marshall Goldsmith, a management expert and author of "What Got You Here Won't Get You There," said that bonuses aren't structured properly but are ultimately a useful tool.

"Bonuses can be very functional if the bonus is indeed tied into the long-term good of the organization," Goldsmith said. "The problem is not: Is it good or bad to have a bonus? It's: What does the bonus measure? What does the bonus reward?"

Once a company takes government bailout money, Goldsmith said, it becomes a different story.

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