Here’s why pay caps just don’t work.
AIG’s collapse wiped out the equity and–temporarily–bonuses of many top employees. Many of these employees had, for understandable reasons, built up lifestyles that cost more than, say, $500,000 a year (pre-tax).
When AIG collapsed and pay czar Ken Feinberg came along, therefore, the employees had a choice:
- Quit and find another job
- Cut back spending
Now, the immediate and understandable taxpayer response to this choice is that the bastards should just cut back because they destroyed the company. But most of these folks presumably had nothing to do with destroying the company (that was accomplished by a few folks in the financial products group who have since left). So it is probably fair to say that most of the these executives were even more distressed by the collapse of AIG than taxpayers were.
Faced with the choice of quitting or cutting back, therefore, those who can find other jobs will probably opt to quit. (Wouldn’t you?.) We can’t force them to stay. Which means that what taxpayers would be left with running their investment were the folks who couldn’t find other jobs. Which is not a recipe for success (or even for getting our money back).
AIG’s CEO Robert Benmosche describes the situation in the WSJ, as well as the new detente with the pay czar, who caved to AIG’s demands:
Serena Ng: Top American International Group employees continue to struggle financially, having taken big personal losses after the near collapse of the giant insurer last year, said its chief executive, Robert Benmosche…
Mr. Benmosche said 10 individuals who report directly to him have lost a combined $168 million in prior years’ pay since the U.S. bailout of AIG in September 2008. Another five employees at AIG’s financial-products division, who are unwinding its derivative trades, have lost $88 million in prior pay.
The executives lost that money when their cash bonuses were cut and unvested stock salary and stock options they previously earned were rendered almost worthless after AIG’s near failure. “Many people think there was no penalty for the executives at AIG when it did poorly and that they need longer-term compensation so they don’t benefit from taking inordinate amounts of risk,” Mr. Benmosche said.
“But if you look at where they’ve been this year, they’ve been pretty much wiped out.