We’ve published a long series on the controversy over retentions bonuses paid by AIG and other firms. (To see the entire series, search for “The AIG Bonuses” using the Google search utility in the upper right corner.)
There are three general problems with executive pay restrictions. First, pay restrictions have no effect on those who were responsible for decisions that went south if they no longer work for the institutions in question.
Second, when imposed retroactively, pay restrictions impair legal contracts. This is both constitutionally suspect and creates serious economic and financial uncertainty. Markets perform poorly when parties cannot rely on the rule of law–including contract law.
Third, pay restrictions deter the recruitment and retention of the most qualified people. Some will be motivated by nonfinancial considerations such as a sense of duty or public spiritedness. However, these motivations are undermined when the public or its representatives treat them as if they were culpable for the problems they have agreed to serve, often without pay, to correct.
Today’s Wall Street Journal suggests that AIG now faces this government-induced dilemma.
Liam Pleven, Serena Ng and Joann S. Lublin report that Robert Benmosche has told the AIG board that he is considering stepping down as chief executive:
The executive is chafing under constraints imposed by AIG’s government overseers, particularly a recent compensation review by the Obama administration’s pay czar, Kenneth Feinberg, according to the people. AIG, 80% government owned since a rescue last year, is one of the companies under Mr. Feinberg’s purview.
Last week, Mr. Benmosche and other AIG board members met with Mr. Feinberg in New York. During the three-hour meeting, board members discussed difficulties of complying with pay policies and retaining talent at the company. Mr. Benmosche’s frustrations “hit a crescendo,” said a person familiar with the matter. “Bob feels he is in an impossible situation,” the person added. Mr. Benmosche didn’t respond to a request for comment.
The tensions over compensation and the prospect of another change atop AIG highlight a problem central to this era of government bailouts: the difficulty of finding experienced executives who are often accustomed to exercising broad authority, and then putting restrictions on their decisions.