AIG issue turns attention to retention bonuses

NEW YORK -- The furor over American International Group's million-dollar payouts to employees who nearly toppled the insurance giant is turning a spotlight on what critics say is a frequent abuse in the way corporate executives are paid.

AIG is shelling out $450 million in so-called retention bonuses. Such payouts have been used to keep coveted employees from jumping ship during periods of corporate upheaval, typically caused by a merger or bankruptcy. Compensation experts say the bonuses can serve a legitimate purpose, especially if the workers getting them are likely to lose their jobs within months.

But as overall executive-pay levels have surged, executives increasingly have used retention payments to ladle out more money to themselves while walking out the door, critics say.

Executives "have been using these as a vehicle to scoop extra compensation for themselves for years," said David DeBoskey, an executive-pay expert at San Diego State University. "Retention bonuses have been used for nefarious purposes to enrich executives of organizations where their futures are uncertain."

Retention bonuses have been overshadowed in recent years by other forms of executive pay -- including salaries, regular annual bonuses and stock options -- that generated far louder howls of protest.

But retention pay was thrust into the executive-compensation debate with the disclosure by AIG that it paid $165 million to employees of its Financial Products division. The unit made disastrous bets on securities known as credit-default swaps that ultimately led to billions in losses and necessitated a government bailout costing $170 billion to keep a failure of the company from bringing down the global financial system.

Outrage over the bonuses intensified Tuesday as New York Attorney General Andrew Cuomo revealed that 73 AIG workers received bonuses of $1 million or more, including 11 who have since left the company.

Critics say it's incongruous for AIG to dish out millions to employees of a unit that lost more than $40 billion last year, especially because the unit is being gradually dissolved. But AIG says it promised the payments to about 400 employees in early 2008 -- before the depth of the financial crisis became known.

At the time, the unit "was expected to have a valuable, ongoing role at AIG," the company said in a five-page memo prepared last week for the Treasury Department.

According to the memo, $55 million was paid in December and $165 million was going out Friday. An additional $230 million was scheduled to be paid this year.

In the memo, the company contended that it was legally obligated to honor the contracts that call for the bonuses. But some legal experts say the government might have some options to block or reverse the bonuses.

One possibility mentioned by members of Congress would be to create a tax that would confiscate potentially all of the payouts. Such a tax probably would face scrutiny on constitutional grounds, but Beverly Hills, Calif., lawyer Anthony Glassman said it could be designed to withstand such a challenge.

Glassman said the government would have difficulty persuading a court to nullify the bonus agreements. "The only way to solve this is legislatively," he said.

Some lawyers say trying to reclaim the bonuses would cause more harm than good. "All commerce throughout the world is dependent on the sanctity of contracts," said James Donovan, a Los Angeles attorney.

A challenge could make it difficult for financial companies to recruit employees because they might fear their employment contracts would be broken, he said.

Some compensation experts say the bonus agreements were reasonable last spring when Wall Street thought it could rebound intact from the subprime debacle. At the time, the financial engineers who concocted the exotic securities were highly sought-after. And arguably traders who create such securities might be the best people to unwind them.

"Just like you need Bernie Madoff to help you find where all the money went even though you'd rather throw him in jail and never talk to him again, you need the people who were involved to help undo" the securities, said Adam Zoia, founder of executive search company Glocap in New York.

Still, critics argue, the AIG payouts underscore the excesses that have marked retention bonuses in recent years. Even some Wall Street headhunters who negotiate the bonuses believe they became excessive.

"We're coming out of a very greedy time," said Jeanne Branthover, head of the financial-services practice at Boyden Global Executive Search in New York. "Everything got exorbitant, whether you're talking retention bonuses or (annual) bonuses or anything."

Staff writers E. Scott Reckard and Ken Bensinger contributed to this report.