CASE STUDY: AIG Controversial Retention Bonuses at AIG
American International Group (AIG), a behemoth insurance and financial services company, became notoriously famous in early 2009 for the payment of $1! million in retention bonuses to employees in its "inancial #roducts unit %his &as the same unit that &as instrumental in brin'in' AIG to its nees and necessitatin' the infusion of billions of dollars in * * 'overnment bailout money Althou'h the near+collapse of AIG AIG &as si'nificantly influenced by soured trades entered entered into by the company-s company-s "inancial #roducts division,. division,. the operations of other AIG units, such as the financial 'ambles of its Investments unit, helped cripple the company as &ell1 /apidly /apidly mountin' mountin' financial losses had been occurrin' in the "inancial #roducts unit for some time onseuently, AIG decided to un&ind the business and shut it do&n In early 200, employees in the unit &ere ased to remain &ith the company throu'h the shutdo&n and, essentially, to &or themselves out of a 3ob 2 %o entice talented employees to stay and &or, a contractual retention bonus plan &as instituted4 Accordin' to a report in The Washington Post , the the "inan "inanci cial al #rod #roduc ucts ts emplo employe yees es &ere &ere repe repeat atedl edly y assu assure red d that that AIG &oul &ould d hon honor or thes thesee 5 contractual obli'ations %he bonus plan &as hi'hly favorable favorable to AIG-s AIG-s "inancial #roducts #roducts employees, employees, as there &as no firm connection to their 3ob performance %he unit-s employees &ere paid bonuses totalin' $524 million in 2006, despite a paper loss of $11! billion on to7ic real estate assets!%he 200 200 bon bonus us plan, plan, &hich &hich &as approved approved in 8arch 8arch of that that year year 3ust 3ust as the unitunit-ss losses losses &ere &ere 6 be'innin' to surface, surface, &as desi'ned to ic in &ithout re'ard to paper losses. "or 200, paper losses on the to7ic real estate assets ballooned to $2 billion, and total losses &ere more than $50 billion Accordin' to e& :or Attorney General Andre& uomo, &ho &as threatenin' le'al action a'ainst AIG, seventy+three "inancial #roducts employees received $1 million or more in bonus payments %he top recipient, identified by The Wall Street Journal as ;ou'las #olin', received more than $5 million, &hereas the ne7t half+do
1 * ' and = #leven, An AIG nit-s >uest to ?uice #rofit *ecurities+=endin' @usiness 8ade /isy @ets %hey @acfired on Insurer,. The Wall Street Journal (Bastern (Bastern edition) ("ebruary !, 2009)C 1 2 D E ?enins, ?r, %he /eal AIG ;is'race,. The Wall Street Journal (Bastern (Bastern edition) (8arch 2!, 2009)C A11 4 Ibid 5 Ibid ! / *mith and = #leven, *ome Eill #ay @ac AIG @onuses,. The Wall Street Journal (Bastern (Bastern edition) (8arch 19, 2009)C A1 / *mith, ? Eeisman, Eeisman, and = #leven, *ome at AIG @uc Bfforts to Give @ac @onus #ay,. The Wall Street Journal (Bastern (Bastern edition) (8arch 2, 2009)C 1 6 *mith and #leven, *ome Eill #ay @ac AIG @onuses,. A1 Ibid
one other employees received $1 million or more9 Ff those people collectin' more than $1 million, eleven have already left the company, 8r uomo-s office said.10 Ehen the retention bonuses &ere paid in 8arch 2009, the * on'ress, #resident Fbama-s administration, and the public &ere outra'ed nder intense political pressure, AIG-s BF Bd&ard =iddy, &ho &as &orin' for only $1 a year, ased the bonus recipients to cou'h up half their pay, despite fearin' that resi'nations &ould follo&.11 In defense of the bonuses, ho&ever, Gerry #asciucco, head of the "inancial #roducts unit, observed that the top bonus recipient, ;ou'las #olin', had successfully sold off several holdin's in his area of responsibility, infrastructure and ener'y investments De-s done an e7cellent 3ob at the tas of un&indin' his boo, of reali
After 12 months of hard &or dismantlin' the companydurin' &hich AIG reassured us many times &e &ould be re&arded in 8arch 2009 &e in the financial products unit have been betrayed by AIG and are bein' unfairly persecuted by elected officials In response to this, I &ill no& leave the company I tae this action after 11 years of dedicated, honorable service to AIG I can no lon'er effectively perform my duties in this dysfunctional environment, nor am I bein' paid to do so =ie you, I &as ased to &or for an annual salary of $1, and I a'reed out of a sense …
9 Ibid 10 Ibid 11Anonymous, %he AIG 8ess Gets Eorse,. Business Week (512!) (April , 2009)C 12 *mith, Eeisman, and #leven, *ome at AIG @uc Bfforts to Give @ac @onus #ay,. 1 14 Ibid 15 Ibid 1! Ibid
of duty to the company and to the public officials &ho have come to its aid Davin' no& been let do&n by both, I can no lon'er 3ustify spendin' 10, 12, 15 hours a day a&ay from my family for the benefit of those &ho have let me do&n1
Eith respect to his intention to not return the retention bonus, ;e*antis &rote,
I have decided to donate 100 percent of the effective after+ta7 proceeds of my retention payment directly to or'ani
;e*antis-s Fp+Bd piece stimulated much discussion re'ardin' the proper response to the retention bonus fiasco ;id ;e*antis do the ri'ht thin'H %his case &as &ritten by 8ichael 8cuddy, %he =ouis * and 8ary = 8or'al hair of hristian @usiness Bthics and #rofessor of 8ana'ement, olle'e of @usiness Administration, Jalparaiso niversity
Discussion Questions
1 Ehat types of &or behaviors did AIG intend to encoura'e throu'h its retention bonus planH 2 Ehich needs seem to be important to the employees of AIG-s "inancial #roducts unitH 4 sin' the model of the individual+or'ani
1 ? ;e*antis, Fp+Bd ontributorC ;ear AIG, I >uitK,. NY Times.Com, httpCLL&&&nytimescomL2009L04L2!LopinionL2!desantishtml (accessed ?uly 2, 2009) 16 Ibid
! %he amount of compensation earned by e7ecutivesas &ell as by professional athletes and famous actorsLactresses and musiciansoften spars emotionally char'ed debate ;o you believe the $1 million plus retention bonuses received by seventy+three employees of AIG-s "inancial #roducts &as e7cessiveH Ehy or &hy notH Ehat &ould you have done if you &ere one of the seventy+three "inancial #roducts employees &ho received a retention bonus of $1 million or moreH B7plain the reasonin' behind your ans&er
Ans&ers 1 %he AIG did not lin the bonus to the performance and I believe that the &or behaviors &ere not related to bonuses and the same could be said about the performance
2 eed of retention in 3ob &as important to employees super added &ith the bonus paid to them annually 4 Any 'iven employee of any or'ani
5
Dert
! %he bonus seems to be e7cessive but no& days the entire focus has been shifted to the individualism and the core competencies
&hether for person or or'ani
