Linking compensation to performance
March 15, 2009UPDATES:
March 16, 2009 AIG Faces Pressure From Obama, Subpoena From Cuomo on Bonuses
Main Story:
American International Group Inc. (AIG) reported it is paying $165 million in “retention pay” and bonuses to its executives. AIG claims that not paying this amount can lead to legal actions against them as these contracts were drawn in early 2008 prior to the financial meltdown. The government has since agreed but asked AIG to look into its bonus pay structure. AIG reported $61.7 billion loss for its fourth quarter last year; the biggest in its corporate history. The insurer has also benefited from more than $170 billion from the US government.
What I am having a hard time understand, is how can an organization with supposedly so much talent can draw contracts without taking into consideration employee performance. With all their expertise in HR and law, I find it difficult to believe AIG signed contracts basically saying to its employees that apart from your salary which is the compensation for your work, we will pay you millions of dollars for gracing us with your talent, and who cares if this talent leads us on the brink of bankruptcy.
What doesn’t make more sense is that a large part of these “retention pays” are going to the same department that is primarily responsible for AIG’s downfall. It is these same employees that made wrong decisions that are being rewarded. And I will not be surprised if other multibillion dollar corporations are doing the same and have lost sight of the big picture; Merrill Lynch & Co. paid $3.6 billion in bonuses shortly before being acquired by Bank of America.
Somewhere between those HR courses at school to the executive’s office, the simple HR principles are lost; tying compensation to performance, and not just at individual level, but team and corporate level. It is upsetting to see how these simple principles have been forgotten leading to corporations dispensing large sums of money for under-performance of their employees – money that now is coming from the tax payers’ pockets.
Maybe it is time we looked at the basics while also understanding how actions in one area can affect other parts of the organization; once again, after decades, we talk of removing silos and treating an organization as one unit. Although in AIG’s case even looking at the department, it doesn’t make sense for them to receive any bonuses. AIG as a business has failed, and the only reason for their survival is their sheer size and integration into multiple areas, and after Lehman’s, the government could not afford another disaster – thus the bailout. It is time for AIG and others to restructure their compensation packages to reflect the organization’s progress.
Let’s return to the basics again.
Source: Bloomberg.com; Photo by ABC News.
