Monday, March 16, 2009

Pay for (under) Performance

Interesting read in The Wall Street Journal today – front page, right hand side. AIG (American International Group Inc.), now 80% owned by the U.S. government after receiving a series of monetary aid packages (the the tune of just north of $173 billion, thank you very much), is paying out bonuses of about $165 million. The best part? The bonus payments are planned for employees at AIG’s Financial Products business unit, which was responsible for about $40.5 billion in losses last year.

You read that right. $165 million in bonuses for losing $40.5 billion.

Losing $40.5 billion!


One can only imagine what the bonus payment would have been if the unit had stepped up and worked its way to a $50 billion loss. Makes one wonder what their goal is for this year.

Of course, bonus shenanigans are nothing new in the finance community. I’ve even benefited from some of the absurd practices, so who am I to spout off about it? Naturally, that’s not going to stop me, as I’ve never been one to be short on giving opinions.

One thing everybody needs to know right away is this: In the investment business, the people always find a way to carve out their more-than-fair share of the money. Oh, and when I say “people,” let me clarify – that’s not the customers or even the rank and file employees, but rather the “rain makers” that make the deals happen. It simply doesn’t matter if the deal makes money or loses money, whether it’s a buy or a sell, a bearish position or a bullish position, the market goes up or down; the “chop” is always there for the taking. In fact, in the business, they even personalize it and refer to it in almost human terms – my dearest and bestest friend, “Max Chop.”

Don’t get me wrong, there’s incentive aplenty for making some money. But, making money is certainly no requirement. Ever hear of State Street Corp.? Of course you haven’t – it’s a money management business that provides services to the securities industry, but it does provide us a neat little tale. You see, State Street’s CEO, Ronald Logue got a raise in 2008. State Street’s “accomplishments” over the year included taking $3.6 billion in losses, receiving $2 billion in TARP funds from the government, and seeing its stock price fall from $83 to $ 22. Those “highlights” are, admittedly, not that great, so it’s no real surprise to find that Logue’s raise was a measly 1.4%. That’s the bad news for Logue. The good news is that the 1.4% raise equated to $400,000, raising his pay from $28.3 million to 28.7 million. Hey, a guy has to eat.

Such tales of regal compensation are not just recent phenomenon either. You might remember one Stanley O’Neal, former CEO of Wall Street stalwart, er, rather, former Wall Street stalwart and now Bank of America subsidiary, Merrill Lynch. In October 2007, in a “how the hell did I miss that” precursor to the financial crisis that hit the fan a year later, Merrill took a write down of some $8 billion due to losses on crappy subprime mortgage investments. [Hello! Big clue! Bloody knife found on the floor! That and Bear Stearns a couple of months later? If I only had a time machine!] Merrill posted a big loss for the period, and the stock sagged. In the age of accountability, heads had to roll, and the company decided to make a big statement and sever the head at the top. The even reported out publically, almost thumping their chests – O’Neal was not going to receive any additional severance or bonus beyond his $161.5 million package.

Sucka, wha?

Remember, that was for losing a couple of billion. A billion here, a billion there – pretty soon, it adds up to some real money.

It’s not only investment banking, you know. Home Depot paid Robert Nardelli over $200 million to leave, also in 2007 (otherwise known as “the year of the golden parachute”). Interesting to note how that might have been a wise move by Home Depot, as Nardelli has done such a bang up job since then in his new post at the helm of Chrysler. Now, I don’t begrudge these kinds of compensation practices. If we’re stupid enough to tolerate it and pay that kind of money, kudos for them stepping up and cashing those paychecks. Remember, we’re the same society who will actually nod our heads in agreement when hearing a $20 million plus actor bemoan about the “brutal,” “grueling,” and “exhausting” shoot of a feature film. Hey out of touch actor, you’re hardly scrubbing toilets or picking cotton.

No, free enterprise and capitalism will ensure you are paid relative to the value the market places on you. The higher the perceived value, the higher the pay, and that’s a nice correlation that fits so snuggly together, like peas and carrots. The dudes above who got PAID? Good for them, either for having the foresight to write such terms into their employment contracts or for having the good fortune to work for a bunch of knuckleheaded bosses and shareholders. We don’t need to get mad, or for that matter, to get even. We just need to learn from the experience and ask ourselves one little question – How do I get my piece of this seemingly big pie before there’s nothing left but crumbs?

That’s just this guy’s opinion.

If you like what you read, be sure to follow me on Twitter @RayHartjen.

No comments:

Post a Comment