The Bright Side of Big Bonuses

March 20, 2009— -- 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.

"There is a clear difference if people are or are not taking taxpayer money," he said. "If people are taking taxpayer money, I think taxpayers have every right to challenge bonuses."

AIG Gives Attorney General List of Bonus Payments

AIG CEO Edward M. Liddy, before Congress this week, defended the payments, saying they were necessary to retain the best workers and make the company as profitable as possible for the taxpayers.

"What we asked them to do was to stay, do a specific amount of work, and if you do that at the end of that period of time and you've done that work, we will give you a retention bonus," Liddy told Congress. "That's what those payments were."

Thursday afternoon, AIG provided New York State Attorney General Andrew Cuomo with a list of employees who received the retention payouts. Cuomo would not say if he would make the names public.

"We are aware of the security concerns of AIG employees, and we will be sensitive to those issues by doing a risk assessment before releasing any individual's name," he said in a statement. "The Attorney General's Office is a law enforcement agency and is experienced in making these assessments."

Cuomo added that his office will be working with AIG over the next few days to determine which employees received payments and which chose to return the money they received.

He promised to "responsibly balance the public's right to know how their tax dollars are spent with individual security, privacy rights, and corporate prerogative."

"At this moment, with emotions running high, it is important that we proceed diligently, with care, reflection and sober judgment," Cuomo added.

Retaining Good Employees

Lisa Anderson, founder and president LMA Consulting Group, Inc. in southern California said bonuses, generally speaking, can play a big role in retention.

"Overall, I believe that money is not a motivator but the lack of it is a motivator," she said. "If you're not compensated fairly for your skill sets and background, it is definately a motivator to get out."

John Berlau, director of the Competitive Enterprise Institute's Center for Investors and Entrepreneurs, likened Wall Street bonuses to those given to professional athletes for winning a championship. Baseball players might be highly paid and love the sport, but they also have a financial incentive to win the World Series.

"If you ban bonuses, what will happen … the upfront salaries will be higher without any requirement for performance," Berlau said.

Berlau spoke out against legislation passed by the Democratic-led House Thursday that would slap punishing taxes on big employee bonuses at firms bailed out by taxpayers. The bill would impose a 90 percent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies that have received at least $5 billion in government bailout money.

"People who are in demand, be they entrepreneurs or CEOs … will find a way to get high salaries," Berlau said. "As much as [Apple CEO] Steve Jobs loves his work, he'd find something else to do if you taxed his salary at 90 percent."