The Ins And Outs Of Executive Compensation
MICHELE NORRIS, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.
MELISSA BLOCK, host:
And I'm Melissa Block.
The head of the insurance company AIG, Edward Liddy, told Congress today he's asked workers in the company's Financial Products division to do the right thing.
Mr. EDWARD LIDDY (CEO, AIG): Specifically, I've asked those who've receive retention payments in excess of $100,000 or more to return at least half of those payments. Some have already stepped forward and offered to give up 100 percent of their payments.
BLOCK: To find out more about what retention payments are and what they're designed to do, we're joined by John Martini. He heads the executive compensation group with the law firm Reed Smith in Philadelphia. Welcome to the program.
Mr. JOHN MARTINI (Head of Executive Compensation Group, Reed Smith): Hi, Melissa.
BLOCK: And Mr. Martini, what is the purpose of a retention bonus? When is it typically used?
Mr. MARTINI: Well, retention bonuses are very common, and they're typically used when a company is going through some type of difficulty, some type of uncertainty. They are used most often in times of a transaction or an acquisition. And the idea for a retention bonus is to ensure that the key employees that are most important to the company will stay through a certain period of time to provide services to the company that it needs.
BLOCK: You want to hang onto them. If they jump ship, you're worried about the company going even farther downhill?
Mr. MARTINI: Absolutely.
BLOCK: In the case of AIG, we're talking about retention bonuses for 2008. And if I understand this right, these were put into place at a time when the company was started on this downward spiral. So they were basically saying to their employees, we're going to pay you to stay with us through this period.
Mr. MARTINI: That's right. I think this was a time before the real financial crises hit, but there were some issues in the financial services industry -some early signs, I think. And in order to keep key people there, they felt they needed to retain these people with bonuses that were tied specifically to a period of service with the company.
BLOCK: So it's tied to a period of service, not tied to performance of either the employee or the company.
Mr. MARTINI: That's right. My understanding of the bonuses in question here is there were actually two components to them. And half of them, or one portion of them, I should say, the first component was tied specifically to a period of service and had nothing to do with performance. There was a second piece that was tied to performance, but those aren't being paid because, obviously, the company didn't perform well. So the bonuses at issue here are simply bonuses that if you work through X date, we will pay you Y amount of dollars.
BLOCK: Okay. Now in this case with AIG, New York's Attorney General Andrew Cuomo has said that 11 people who got these retention bonuses of at least $1 million have left AIG. So if the purpose is to retain employees, how do you explain that?
Mr. MARTINI: Well, that's not uncommon at all. And as you can imagine, if you were an employee in that position, you would be targeting the specific date on which you had to work through in order to get the bonus. So the way the contract is written is there will be a specific date. If you work through December 31st, then we will pay you this bonus. So somebody who works through December 31st may leave on January 1st of the following year and still be entitled to that bonus. That's part of the contract. They fulfilled their obligations under the contract to get that money.
BLOCK: Mr. Martini, these bonuses have obviously become such a political hot potato. From your side of things, representing clients and negotiating these contracts and these bonuses, how do you see the debate that's going on now and the rhetoric that's being used?
Mr. MARTINI: As a policy matter, it certainly is understandable why, you know, we, the American taxpayer, are outraged by this. There's a fairness question. But I do think it's a huge distraction. If you do work in this field, you see these retention bonuses are used all the time. They're very important to companies that are in difficult times. And they should be used in the future. I also think it's a distraction from the ultimate party that's responsible for this, which in my view is Congress, in allowing AIG to have gone into the credit default swap business back in 2000.
BLOCK: Now when you say Congress allowed them to go into the credit default swap business, what do you mean?
Mr. MARTINI: Shortly before the Christmas break in 2000, there was a law passed that really allowed credit default swaps to be used where they weren't before. If that had not taken place, our economy would not have expanded in the false manner that it did, at the rate that it did. And I have not seen our elected officials take the proper responsibility for their actions in this matter.
BLOCK: John Martini, thanks very much.
Mr. MARTINI: Thank you.
BLOCK: John Martini heads the executive compensation group at the law firm Reed Smith in Philadelphia.
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