The House has passed the Bonus Tax Bill after the AIG bonus furor.
“The House measure was approved on a 328-93 vote and would impose a 90% surtax on employees who earn more than $250,000 at companies that have received at least $5 billion from the government’s financial rescue program. The bonus tax, if approved by the Senate and signed into law, would be retroactive to Dec. 31, 2008.”
I am glad that the bill is passed and the real reason for that is — now the people at AIG Financial Product Division will surely quit.
I was watching Mr. Edward Liddy’s testimony and there is one piece that has been on my mind ever since. But before that, some interesting facts that I gathered from his testimony:
Last Friday, AIG awarded millions of dollars of bonuses to employees of the AIG Financial Products Division. This is the same unit that made massive losses and brought AIG to its knees. These bonuses were not “performance bonuses” but rather “retention bonuses”
In the beginning of 2008, AIG had made contracts with these employees, that promised them bonuses, if they stayed throughout 2008 and wound down the derivative contracts they wrote earlier.
The Financial Products unit itself is about 450 to 500 people, but the people who caused the real damage form a much smaller sub – unit of around 20 people or so.
Each financial contract is unique in itself and the person who wrote that contract is in a much better position to wind it down, rather than another person with similar ability but no knowledge of the contract.
In fact that is the main reason of paying the bonus. They didn’t want to lose the person who wrote the contract.
The second most important reason is that they had a contract which had to be respected.
Mr. Edward Liddy joined as CEO about six months back at the behest of the government and is just drawing a $1 per annum salary.
Obviously, any man who takes up this kind of job has nothing but the greatest good of the country in his mind (and maybe a little glory after wards). The main reason that Mr. Liddy has allowed the bonuses is because he felt the people getting the bonuses were irreplaceable.
In fact, all other banks and financial institutions have made the same case — that if they don’t give out the bonuses; they will not be able to retain their top talent, which implies that they can’t buy cheaper talent from the market.
And this is what has been on my mind ever since: Are these people really that talented?
Unfortunately, there is no way to find that out without firing these people. Fortunately, something quite close to that has happened.
These taxes mean that all these people have no incentive to work in the same company or even the same industry any longer and a lot of them will leave. If that happens, then according to the people who were in favor of the bonuses — the results will be catastrophic.
I think there won’t be any catastrophic results and these talents are largely mythical. Why do I feel that way? Because there are hundreds of people doing the same job. Some may be more familiar with a derivative contract than another, but, that doesn’t mean that they are irreplaceable.
And, when we find out that these people were replaceable that will hold a good lesson for future generations on:
How Not To Award Bonuses To People Who Screwed You In The First Place.