The AIG Bonuses, Part 9:
Evidence shows that incentives matter
14 Apr 2009 in Regulatory Economics, Regulatory Policy, Legislation
In this series we've predicted that the government's efforts to confiscate employee bonuses would have significant unintended consequences. Specifically, the highest-valued employees of AIG and other targeted firms would quit rather than subject themselves to public humiliation and the loss of income to which they were contractually entitled.
In the Wall Street Journal, Liam Pleven and Randall Smith report that this is now happening, with predictably adverse consequences for the taxpayers who now own these companies.
American International Group Inc.'s financial-products unit is on track to wind down by year end, but the controversy over bonuses that led to the loss of some key people may have made the process more costly for taxpayers, the unit's head said.
AIG Financial Products head Gerry Pasciucco, in his first extensive public interview since the bonus dustup last month, said 20 of the unit's 370 employees quit amid the controversy, in which taxpayers and members of Congress decried retention payments to employees at the unit that helped topple the big insurer.
...
Mr. Pasciucco says the controversy "hurt morale" and "stunned people such that our wind-down has slowed down." He added, "Taxpayers probably have been damaged."
The reason taxpayers would be harmed is that departing employees have special expertise for which there are only imperfect substitutes.
Overall, Mr. Pasciucco said, about a third of the resignations were from the financial-products office in London. He said that Jake DeSantis, an executive who announced his resignation in a New York Times op-ed piece amid the controversy, is still on the job short term as the commodity business he works on is resolved. AIG didn't make him available for comment.
Compensation is still an issue, Mr. Pasciucco indicated. AIG was due to pay out roughly $230 million of the bonuses for the current year, but [AIG CEO Edward] Liddy told Treasury Secretary Timothy Geithner that he would try to reduce that amount "by at least 30%." He also said some employees would take a 10% pay cut, and the 25 highest-paid, active contract employees would cut their remaining 2009 salary to $1.
The employees need more than certainty, of course. For example, knowing for certain that their income will be confiscated by taxation (H.R. 1586), or that their employers will be statutorily forbidden from honoring legal employment contracts (H.R. 1668), is not likely to help employee retention. Reducing employee salaries to $1 and eliminating bonuses is another way to provide certainty. However, like confiscatory taxation and breach of contract, it's not an effective way to retain highly valued employees.
Targeted employees do not face too much uncertainty -- rather, their problem is too much certainty that they will not be compensated in accordance with their employment contracts. They apparently expect further punitive actions by the government:
In the wake of the controversy, however, Mr. Pasciucco suggested that the unit's employees are wary that their pay could again come under political attack. He said within the coming weeks and months, AIG in concert with the government needs "to give them some certainty about how they're going to be compensated."
More quits should be expected, with greater costs to taxpayers as the job of winding down AIG's Financial Products unit falls to less experienced and technically proficient personnel.
