Explaining The AIG Bonuses

The management of AIG and some members of the Obama administration believe the firm may be legally obligated to pay bonuses to some of its employees. How do the bonuses work? How did they evolve?

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ALEX COHEN, host:

As we heard, AIG's management and some members of the Obama administration believe the company has a legal obligation to pay executive bonuses. To get a better sense of why, here's our senior producer, Steve Proffitt, with an explainer from Slate.

STEVE PROFFITT: It's because that's what AIG agreed to do. Many executives have employment contracts that specify a formula for computing their annual bonuses. Generally, the bonus formulas are determined by the company's board of directors. They might, for instance, promise not to change the formula after a specific date. If the company then fails to pay under the original formula, a disgruntled executive could sue the firm for failing to follow its own rules.

Employee bonuses have their roots in Christmas. In the 19th century, many employers offered a year-end bonus in the form of a gift. A turkey was a popular one. In the early 20th century, most large employers converted those bonuses to cash, often based on a percentage of an employee's annual salary. The practice had become widespread by 1952, when the National Labor Relations board ruled that a Christmas bonus qualified as wages rather than a gift, as long as it was paid at the same time and in a predictable amount every year. In today's corporations, performance-based bonuses have increasingly replaced Christmas bonuses. While Wall Street bonuses sank by 44 percent last year, the total payout was still the sixth highest ever, at more than $18 billion. In addition to bonuses for top executives, most companies grant bonus pools to managers for distribution to their subordinates. Some companies pay lower-tier employee bonuses on a purely discretionary basis, meaning that the company can decide not to pay a bonus with no legal consequences.

COHEN: That explainer compiled by Slate's Brian Palmer, and read by NPR's Steve Proffitt.

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