March 24, 2009 11:54 AM
The Right Way to Punish AIG
The House of Representatives has passed legislation that would tax the bonuses of senior AIG representatives at a 90% rate. In one sense that approach is a good first step forward, and serves as a good example for how to approach similar abuses in other financial services firms. The step forward is that it is aimed at individuals rather than the companies. Companies don't make decisions, their senior executives do. Fine a company and you're really only punishing the stockholders, who in many cases are consumers who own the company's stock in their IRs, 401Ks or stock market accounts.
The mistake is that the House approach uses a shotgun where a scalpel is needed, it leaves the real culprits in place to wreak future havoc to our pocketbooks and the economy, and it micromanages personnel policies.
The mistake is that the House approach uses a shotgun where a scalpel is needed, it leaves the real culprits in place to wreak future havoc to our pocketbooks and the economy, and it micromanages personnel policies.
The policies that have lead to the economic meltdown were all set by a small group of individuals in each company. They include the CEO, his or her direct report responsible for developing policies in that area, and the company's Executive Committee, which is composed of a small group of individuals closely involved in company management on an ongoing basis. Inside the company and below them are people responsible only for executing the policies, including many highly compensated individuals who received large bonuses for doing a good job of executing bad policies. They may indeed be overpaid, but they didn't set the policies. Company Boards of Directors have ultimate responsibility for approving these policies, but the reality is that corporate boards meet only a few times a year, and the company's senior management usually spoon feeds them only that information that will lead them to support policies that in many cases have already been implemented.
There is a two part solution to the problem. Bailout money should only have been provided to companies who first agreed to remove the executives responsible for the policies. That includes the CEO, his or her direct report responsible for developing policies in that area, and the company's Executive Committee. Going forward the federal government should impose that requirement on any future bailout recipients who still have any of those original executives in place. This short term solution will satisfy many consumers' thirst for blood, but more importantly will remove incompetent and short sighted corporate policy makers. It would be a more effective means of preventing bad corporate policies in the future than taxing bonus payments at a high rate. Their successors should be given latitude to refocus the company's direction, which might or might not include substantially reducing bonuses.
That approach will buy us time to develop a long term solution. By almost universal agreement, current performance incentives in the financial services sector are dangerously skewed towards short term performance at the expense of the long term interest of stockholders and the health of the economy. Congress needs to carefully address that problem, passing carefully crafted financial services reform legislation that reverses those priorities. The companies should also be allowed to reward senior management and employees below them who do a good job of implementing policies that are in the best interest of stockholders, consumers, and the economy.
The House-passed bill doesn't meet that criteria. We should restart the process, listening carefully to input from all sides, including the financial services sector. Many financial services executives and trade associations will argue that any limitation on their corporate prerogatives whatsoever will wreck the economy, but hey, they've already done that. Still, some of their cautions will merit careful consideration and analysis. To do this right we need to take a scalpel and make the changes to corporate compensation practices necessary to prevent a recurrence of the economic meltdown, but still enable financial service firms to remain competitive in the U.S. and international markets.
There is a two part solution to the problem. Bailout money should only have been provided to companies who first agreed to remove the executives responsible for the policies. That includes the CEO, his or her direct report responsible for developing policies in that area, and the company's Executive Committee. Going forward the federal government should impose that requirement on any future bailout recipients who still have any of those original executives in place. This short term solution will satisfy many consumers' thirst for blood, but more importantly will remove incompetent and short sighted corporate policy makers. It would be a more effective means of preventing bad corporate policies in the future than taxing bonus payments at a high rate. Their successors should be given latitude to refocus the company's direction, which might or might not include substantially reducing bonuses.
That approach will buy us time to develop a long term solution. By almost universal agreement, current performance incentives in the financial services sector are dangerously skewed towards short term performance at the expense of the long term interest of stockholders and the health of the economy. Congress needs to carefully address that problem, passing carefully crafted financial services reform legislation that reverses those priorities. The companies should also be allowed to reward senior management and employees below them who do a good job of implementing policies that are in the best interest of stockholders, consumers, and the economy.
The House-passed bill doesn't meet that criteria. We should restart the process, listening carefully to input from all sides, including the financial services sector. Many financial services executives and trade associations will argue that any limitation on their corporate prerogatives whatsoever will wreck the economy, but hey, they've already done that. Still, some of their cautions will merit careful consideration and analysis. To do this right we need to take a scalpel and make the changes to corporate compensation practices necessary to prevent a recurrence of the economic meltdown, but still enable financial service firms to remain competitive in the U.S. and international markets.
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