Explaining The AIG Bonuses
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.