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AIG furor puts spotlight on retention bonuses

The payouts, used for years to keep coveted employees from leaving during periods of corporate upheaval, are frequently abused, critics say.

March 18, 2009|Walter Hamilton

NEW YORK — The furor over American International Group Inc.'s million-dollar payouts to employees who nearly toppled the insurance giant is turning a spotlight on what critics say is frequently an abuse in the way corporate executives are paid.

AIG is shelling out $450 million in so-called retention bonuses. Such payouts have been used for years to keep coveted employees from jumping ship during periods of corporate upheaval, typically caused by a merger or bankruptcy. Compensation experts say the bonuses can serve a legitimate purpose, especially if the workers getting them are likely to lose their jobs within months.

But as overall executive-pay levels have surged in recent years, executives increasingly have used retention payments to ladle out more money to themselves while walking out the door, critics say.

Executives "have been using these as a vehicle to scoop extra compensation for themselves for years," said David DeBoskey, an executive-pay expert at San Diego State University. "Retention bonuses have been used for nefarious purposes to enrich executives of organizations where their futures are uncertain. When your future becomes uncertain, you look for a quick hit and it comes in the form of a retention bonus."

Retention bonuses have been overshadowed in recent years by other forms of executive pay -- such as salaries, regular annual bonuses and stock options -- that generated far louder howls of protest.

But retention pay was thrust into the executive-compensation debate with the disclosure by AIG that it paid $165 million to employees of its financial products division.

The unit made disastrous bets on securities known as credit-default swaps that ultimately led to billions in losses and necessitated a government bailout costing $170 billion to keep a failure of the company from bringing down the global financial system.

The securities were essentially insurance contracts in which AIG guaranteed investment banks and hedge funds that it would cover losses on mortgage-related bonds, whose values plunged as the housing downturn set in.

Outrage over the bonuses intensified Tuesday as New York Atty. Gen. Andrew Cuomo revealed that 73 AIG workers got bonuses of $1 million or more, including 11 who have since left the company.

The biggest payout was $6.4 million, and the top 10 people took home $42 million, Cuomo wrote in a letter to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Critics say it's incongruous for AIG to dish out millions to employees of a unit that lost more than $40 billion last year, especially because the unit is being gradually dissolved.

But AIG says it promised the payments to about 400 employees in early 2008 -- before the depth of the financial crisis became known.

At the time, the financial products unit "was expected to have a valuable, ongoing role at AIG," the company said in a five-page memo prepared last week for the Treasury Department about the payments.

The memo said $55 million was paid in December and $165 million went out Friday. An additional $230 million was scheduled to be paid this year.

In the memo, the company contends that it is legally obligated to honor the contracts that call for the bonuses.

But some legal experts say the government might have some options to block or reverse the bonuses.

One possibility mentioned by members of Congress would be to create a tax that would confiscate potentially all of the payouts. Such a tax would probably face scrutiny on constitutional grounds, but Beverly Hills lawyer Anthony Glassman said it could be designed to withstand such a challenge.

Glassman said the government would have difficulty persuading a court to nullify the bonus agreements. "The only way to solve this is legislatively," he said.

But AIG may have misinterpreted a state law in Connecticut, where its financial products unit is based, when it said it couldn't halt the bonus payments, Richard Blumenthal, the state's attorney general, said Tuesday.

Some lawyers say trying to reclaim the bonuses would cause more harm than good. "All commerce throughout the world is dependent on the sanctity of contracts," said James Donovan, a Los Angeles attorney. A challenge could make it hard for financial firms to recruit employees because they might fear their employment contracts would be broken, he said.

Some compensation experts say the bonus agreements were reasonable last spring when Wall Street thought it could rebound intact from the subprime debacle. At the time, the financial engineers who concocted the exotic securities were highly sought after. And arguably traders who create abstruse securities may be the best people to unwind them.

"Just like you need Bernie Madoff to help you find where all the money went, even though you'd rather throw him in jail and never talk to him again, you need the people who were involved to help undo" the securities, said Adam Zoia, founder of executive search firm Glocap in New York.

Still, critics argue, the AIG payouts underscore the excesses that have marked retention bonuses in recent years.

Even some Wall Street headhunters who negotiate the bonuses believe they became excessive.

"We're coming out of a very greedy time," said Jeanne Branthover, head of the financial-services practice at Boyden Global Executive Search in New York. "Everything got exorbitant, whether you're talking retention bonuses or [annual] bonuses or anything."

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walter.hamilton@latimes.com

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Times staff writers E. Scott Reckard and Ken Bensinger contributed to this report.

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(BEGIN TEXT OF INFOBOX)

Bonus pool

Here are details on the largest AIG retention payments made last week:

Amount: Number of recipients*

$6.4 million or more: 1

$4 million or more: 7

$2 million or more: 22

$1 million or more: 73

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*Some recipients may be counted in more than one group.

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Source: New York state attorney general

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Los Angeles Times

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AIG bonus flap

The government aims to recoup $165 million from the giant insurer. A1

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