Donnella dropped a note yesterday, writing: “I’m hearing “guaranteed bonus” in the news a lot, referring to the AIG situation. It seems to me an oxymoron. I understand there are legal concerns but the word bonus must have a different meaning in a contract. I’d like to see your take on this.”
It would seem that money-addicts have invaded and taken control of most large US corporations. The compensation packages they have been giving themselves became more and more obscene as the years lumbered by.
Typical large corporation heads started with outlandish salaries plus stock warranties or options but no amount could satisfy the money addicts, so “(guaranteed) bonuses” were added outside salaries, probably to becloud the issue of total compensation. The term “guaranteed bonus” is not an oxymoron like “jumbo shrimp” or “pretty ugly”, but simply a contradiction of terms.
We all know what a bonus is: it is additional compensation given for outstanding performance, finishing a project ahead of schedule or overfulfilling a contract. So we can’t know ahead of time that a bonus will be due. However, people whose sole measure of worth and accomplishment is income, need money beyond what stock holders might be willing to endure if their compensation were reported as a lump-sum salary. So, “bonuses” were built into contracts, that is, guaranteed.
The current euphemism for them is retention bonuses, under the assumption that without them, an executive would move on to another company. A retention bonus actually sounds more like a bribe. Now, the absurdity of bribing the total failures at AIG to stay and continue undoing the company seems to escape those who tender this argument.
The argument goes on: only those who led AIG into its mess have the skills and knowledge to lead it out of its mess. It strikes me that these people are far more likely to make mistakes of the same magnitude leading the company back toward solvency that they made leading it flatly into insolvency. Maybe logic has changed since I was an undergraduate.
In all probability, if bonuses returned to what the word means, stock options were curtailed, and salaries were reasonable, large corporations would fare much better. Why? Because fewer money addicts and more people with a long-term commitment to the company would apply for executive positions. People who are as smart and experienced as the current executives of AIG are not hard to find—many are sitting right there in the company now.
Building a net worth of $100 million would still be possible, but only as a result of continuing excellence in management over a significant period. A $50 million per year compensation package and $150 severance payment regardless of performance discourages any commitment to a company beyond the first year.
The newly defined bonuses in the obscenely high compensation packages for corporate executives are therefore bad capitalism. They play to only the basest motivation toward excellence, the one that attracts money addicts. Moreover, without complex compensation packages, we would need far fewer absurd euphemisms like “retention bonus” to becloud the discussion of corporate leadership.