thoughts on the bonuses

[kenberg]

What's up with lobowolf and mikeh lately?  It's a sign of something when gentlemen stoop to sarcasm.

 

[bangs head on table]

Hey, whom you calling a gentleman?!

 

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

You suggested a voluntary portion of Social Security. I don't think that I am just playing with words to ay that for most of us, that comes close to being what we actually have. It's not a portion of Social Security per se that is voluntary but a portion of the general preparation for retirement. I am 70 and I am retired although I still work some (few things are either/or). The Social Security paynebts that I made over tghe year were the involuntary part. i paid into a pension fund, not entirely voluntary but I could select from various plans and levels. I was at a university so i could divert some salary into TIAA-CREF which had choices, some more tied to market performance than others. There were additional plans. And of course i could just go buy some stocks. So if we take planning for retirement as a complete entity, there is a mixture of required and voluntary participation. Allowing a voluntary change in Social Security would change the proportions but would not change the fundamental concept of a mixture of required and voluntary plans.

 

 

I got my Social Security card when I was 14. I was setting pins in a bowling alley and contributions to Social security were required. So I had been paying in for 50+ years when I required. I get somewhat over 20K a year from them, minus charges for Medicare and taxes. One could say that this isn't much after fifty years of contributions but the flip side is that this is, or is advertised to be, the rock solid part of my retirement. The stock market can drop out of sight and prices can soar, the payment is indexed to inflation and guaranteed by the government.

 

 

Preparation for retirement should have a voluntary part and a non-voluntary part. Presumably the non-voluntary part should be roughly adequate so that if the person totally mismanages the voluntary part then, in retirement, he will still have enough to get by. The alternative woould be that we have old people that we either let starve or we support in some other way that just would not be called social security. I would not want to be living on 20K a year but people do. If Social Security can be properly funded to maintain its current role of providing for very modest support it seems like it is doing its job. It's in the nature of voluntary that no one is stopping people from preparing, or failing to prepare, for a better retirement.

[PassedOut]

Social security is not just a retirement plan. As part of the social safety net, it provides some insurance for disabled workers, for up to five spouses, and for children.

 

Most of us rely much more on voluntary pension plans, savings, and other assets we've built up over the years, and rightfully so. But the social safety net is also important to maintain. If the social security retirement plan were to become voluntary and/or privatized, we would still need taxes to provide for the disabled, spouses, and children.

 

And there would also be the problem of paying for the retirement of those who did not contribute voluntarily to the fund, and for those who lost all of their retirement money via unsuccessful investments.

 

Maybe some can say, "Let them starve," but we just won't let that happen on a large scale. So the taxpayers would wind up footing the bill for those people anyway, without having received the money they would have been paying through the years.

[Winstonm]

For a CDS to be triggered, a default is not always needed. Wikipedia explains:

 

Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument

 

The thing to notice about the CDS is that it is an unregulated product and thus two counterparties can structure the payoff in any manner upon which they agree.

[y66]

Excerpt from a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

DEAR Mr. Liddy,

 

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

 

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

 

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

 

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

 

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

 

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

 

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

 

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

 

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

 

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

 

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

 

That may also be why you authorized the balance of the payments on March 13.

 

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

 

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

rest of letter.

[kenberg]

An extraordinary letter and action. It should be given the most serious attention. I imagine I have to confess to being more than a bit simplistic in my thoughts.

[Al_U_Card]

There is always two sides to every coin.

 

We will all suffer through this period. Some more than others. It is just sad when the responsible get off scott-free.

[barmar]

It always seemed to me like there had to be more to this story than the hype from the press and Congress.

 

What got me in that letter, though, was his statement "You and I have never met." Do you think a company is too big if the CEO has never met some of the vice presidents?

[hrothgar]

It always seemed to me like there had to be more to this story than the hype from the press and Congress.

 

What got me in that letter, though, was his statement "You and I have never met." Do you think a company is too big if the CEO has never met some of the vice presidents?

I suspect that this is more a reflection regarding the staus of VPs in certain industries than the size of the company...

 

In Financial Services you can't swing a dead cat without hitting a random VP

[jdonn]

It certainly is a convincing and powerful letter imo.

[Winstonm]

I remain unconvinced. To me, that letter smacks of being planted.

 

But the truth is, after the incredible propaganda machine that Dick Cheney utilized to disciminate lies and half-truths via a cooperative press corps, I believe virtually nothing that is presented as fact by most of the mainstream media.

[jdonn]

I remain unconvinced. To me, that letter smacks of being planted.

 

But the truth is, after the incredible propaganda machine that Dick Cheney utilized to disciminate lies and half-truths via a cooperative press corps, I believe virtually nothing that is presented as fact by most of the mainstream media.

We have noticed...

[kenberg]

I have thought a little more about this. I have no trouble taking the letter as legitimate and I understand why Mr. DeSantis could decide to tell them to take the job and shove it. But here are my further thoughts.

 

I am not the most generous person that I have ever met but I have, on occasion, given cash to help someone out of a spot. One thing that I expect in such circumstances is that I don't need to look over all of the words with a magnifying glass to understand what is being said. For example:

"Like you [referring to Liddy], I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid."

Later [in the full letter]:

"On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes."

 

 

Yes I understand. He said he was only getting a dollar in salary while the three quarter million after taxes was a bonus, not salary. Still, if I am giving money, which as a taxpayer I am, I find this a little too cute a phrasing for my taste.

 

 

And of course there is the stuff of calling a contracted payment a bonus in the first place. This is not the way I use words.

 

I expect a guy to get paid for working. A bit after I retired, a colleague took ill during the semester and I was asked if I could take over one of his classes for a while. I agreed, explaining he was a friend and if we were talking about a couple of weeks there would be no charge but if it went on much beyond that I would like to get paid. It did go on (he died) and I did get paid. Of course people don't usually work for free and I have no problem with that. Few people do. The problem arises when "bonuses", which sound like optional payments to the untrained ear, turn out to be contractual payments, and they say they are working for a buck but actually get quite substantial sums. It's none of my business unless we are giving them some cash, but in this case we are. Part of this whole financial mess is due to obscurity and cuteness with words, and it gets people pissed.

 

AIG employees fell they are being unfairly labeled and this may be so. But they could help by speaking in plain English.

[helene_t]

In Financial Services you can't swing a dead cat without hitting a random VP

If Schroedinger had lived today he would have constructed a paradox with a bank clerk who was and wasn't a VP at the same time.

[y66]

... and who simultaneously are and are not entitled to be compensated for their clerking and VP'ing labors.

 

Please comment on punctuation on the other thread.

[luke warm]

... and who sit in an infinite number of even numbered offices, making it impossible to ever actually hit anyone

[mycroft]

A few years ago (this is Not My Country, and Not My Dog in the Fight, so I'm not looking it up, but I bet it was about the time the last financial boondoggle hit) there were changes to the reporting and tax laws, that effectively meant that if you made a salary over $500K, bad things happened to you; this did not apply to performance bonuses, which were designed to recognize extraordinary performance.

 

What happened? People's salary became $499,785, and the rest of their $8 million/year compensation became multiple "performance bonuses", which required the extraordinary performance of still showing up to work at bonus payoff time (oh, and stock options, and use of company car, and...) Helped them come tax time, and helped the company when they reported that they paid $X in executive salaries, and $Xx50 in worker salaries (and dropped the $Xx8+ "other compensation" under the rug).

 

It also works well (for PR purposes, at least) when the P-level staff "reduce their salaries to $1". It *sounds* like they've been given enough from the company that now they will sacrifice themselves and effectively "work for free" to keep the company going; especially handy when saying "CEO reduced his salary to $1, it's fair for him to ask you take a 10% salary cut, isn't it?" Well, if the "salary reduction" reduces his paid compensation by only 5%, well, no, not really. If the CEO's paid compensation is in the "it's just a means of keeping score" territory, then no, not really - the worker's 10% cut is much more likely to be in "I need this money" territory.

 

And they act so surprised when someone, finally, calls them on it. Is that because they thought we were stupid, or do they think it's lèse majesté ?

I think a parallel with Microsoft is in order here:

- if the person has the same behavioural and contractual obligations as an employee, then they're not independent, sorry.

- if it's a mandatory, it's not a bonus, sorry.

 

Finally (and I realize that expected paid compensation for these guys is a large multiple of what they actually get paid, at least after office, too), anyone who thinks their job is worth 10+ times that of the President of the United States has a serious ego goggles problem.

[luke warm]

if his salary was $743,006.40, after taxes, but there was an agreement to divide this into $1 salary and $742,006.40 bonuses, i would be pretty upset... but if his bonus was $742,006.40, after taxes, and his salary was actually cut to $1, then they did make a sacrifice... i don't know if that's the case, though

[kenberg]

if his salary was $743,006.40, after taxes, but there was an agreement to divide this into $1 salary and $742,006.40 bonuses, i would be pretty upset... but if his bonus was $742,006.40, after taxes, and his salary was actually cut to $1, then they did make a sacrifice... i don't know if that's the case, though

The latter, I think. Further, I gather he is going to give it to charity as soon as he finds out whether he actually gets it or whether this tax stuff is going to take it all. That idea seems to be getting a well deserved burial.

 

My guess is that he is a good guy. As are many others. But they talk funny. You need a special decoder ring to see what they are saying. "I'm working for a dollar a year" translates to "except of course for my $742,000 bonus".

 

Many years ago a guy was telling me a story of life during the Depression. I was engrossed and the situation sounded so grave I said "Good God, how did you survive?" "oh, there was some money". Again I was pissed. I don't greatly care how much money a guy has, or his family has, but I like to feel that I understand the story he is telling. If a guy says he is working for a dollar a year, I get annoyed to find that nothing of the sort is true, even if he does regard three quarters of a million as so small as to be indistinguishable from a buck.

[barmar]

It would help if we knew what his original salary was. Was he originally being paid $10M plus bonuses, or $250K plus bonuses? Giving up $10M is huge, even if you still get $742K -- he's lost 93% of his compensation. But if his salary was "only" $250K, he's only given up about 25% (although that's still quite a bit).