As I'm sure you've heard, AIG is handing out bonuses to employees of its Financial Products division. From what I've read, the Financial Products Division was responsible for billions in losses, and handled Credit Default Swaps. In short, the Financial Products Division is blamed for much of the current financial heartache at AIG, and possibly the rest of the world.
So, as the story goes, AIG had promised bonuses, via contracts, to a bunch of the employees in the FP division. Total cost? Somewhere around $165 million. That's a crapload of money. Although, if you compare it to the amount of money AIG has received from the government, *cough*$170 billion*cough*, we find that it's a mere 0.1% of the total bailout. That's barely a drop in the bucket.
That's not to say that it should be ignored, however. In fact, it's an outrage and has even caught the ire of the President. And while I'm frustrated that these people are getting these bonuses, I believe I understand what's going on here. Let me explain ...
Until relatively recently, I worked for a large telecommunications company. Working for a large corporation, I learned that bonuses were handed out yearly, supposedly based on performance. The definition of performance seemed to change each year, though, just to ensure that we got our bonuses. So for one year, it was based on customer retention, and the following year it was based on the number of lines we had.
In addition to changing the definition of performance, there was a good deal of "cheating" that occurred. Sales numbers were artificially inflated through creative accounting methods such as breaking apart bundled sales and counting them as separate sales. Or, my favorite, giving away "free second lines" and then counting them as both sales and part of the total line count. This way, they met their bonus requirements AND made the company look better to potential buyers. Insanity, in my opinion.
What made all of this worse was how they handed out bonuses. Regular employee bonuses could be anywhere from 0-10% of their base salary. Managers received a flat 10%. VP's got something like 20% and EVPs got up to 40%. I don't remember if the EVP rate was variable or not. Regardless, the higher you were on the food chain, the more money you received as a bonus.
I find this entire bonus structure to be both offensive and wasteful. I've heard numerous claims that bonuses are essential to obtaining and keeping high quality employees. I cry bullshit. As a potential employee, I would rather have a job with a guaranteed high salary and potential low bonus rather than a low salary and high bonus. Sure, bonuses are nice in that it's a quick infusion of cash, but it's by no means guaranteed. In fact, I'd argue that the creative accounting and cheating is a result of offering bonuses like this.
Instead, how about a new bonus structure. First, offer higher salaries across the board. Make sure your managers can properly manage their employees and trim out anyone who can't pull their weight. This way you get the best employees without lugging around any dead weight. Next, set up the bonus tiers in such a way that the lowest employees on the totem pole get the highest bonus percentages. Look at it this way; managers and VPs make more money than the average employee to begin with, so a lower percentage generally still results in a higher bonus anyway. Doing it this way still ensures bonuses for the higher ups, while increasing morale for employees because it appears that they get larger bonuses. And, in one way, they do.
Finally, for those employees in VP or higher positions, drop bonuses completely. Instead, offer stock (in reasonable amounts) and tie their "bonus" directly with the company. This way, if they work hard, inspire the employees, and grow the company, their stock increases in value and they make money. Do nothing and the stock drops and they lose money. Thus, their "bonus" becomes directly tied with the health and financial well-being of the company.
Unfortunately, I don't see any of the current practices changing anytime soon, so I expect to see more of the same. Thankfully, I have escaped from the corporate machine, so I can avoid much of this insanity for the foreseeable future. But for those of you on the inside, I say fight. Fight against the insanity. Those of us on the outside support you.
