Why AIG should NOT hold back bonuses

The news that AIG will hold back $21 million in bonuses may be sweet to the outraged American public that now owns most of the firm, but it’s bad for business.

It’s easy to hate the employees of AIG’s financial products unit that helped set off the global financial meltdown. But, despite their bad decisions, some of them have been making only a dollar or two a year for two years now. And they themselves lost fortunes when AIG’s stock dropped nearly 70% in one day. Without those bonuses, there’s little incentive for them to stay at their jobs. A lot of good people have already left.

It’s critical that AIG retain talent in this unit because AIG still has a trillion (yes, trillion) dollars in credit swap derivatives. These investments are actually turning around and should bring in profits over the years ahead.

AIG also needs to worry about lawsuits. A year ago today, I had an OpEd published in the Wall Street Journal stating:

(These bonuses) are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy (then CEO of AIG) wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.

And that’s what we can expect now, with an attorney representing a dozen AIG employees calling the holdback “a breach of their contract and a violation of the Connective Wage Act.” As a Wall Street Journal article points out, AIG potentially risks paying out double the amount it withheld in bonuses if it is found liable for violating wage laws. AIG acknowledged this risk a year ago, but apparently, it can’t ignore the demands from federal pay czar Kenneth Feinberg.

Feinberg told Fox Business News yesterday that in the next few weeks he’ll be prescribing pay guidelines that will be "tough medicine" for AIG and the other four companies that received help under TARP. He said, "Congress decided that since the American people saved these companies and are the chief creditors of these companies, they have a right to have a say, in just these five companies in individual compensation."

Maybe Feinberg has the right to make these demands, but they won’t help AIG hold onto the talented people needed to rebuild the company. And if AIG has to pay out on those employee lawsuits, it will have an even harder time paying back taxpayers.