Saturday, March 21, 2009

Mendacious names and a magic number

When you read outraged denunciations of the AIG retention bonuses, the writers almost always state that the bonuses went to “executives” or “managers”. Google aig+bonus+executive and you see lots of references to the “executives” who got these bonuses. Or browse through these snippets (emphasis always mine):

AIG is paying out millions of tax dollars in bonuses to their incompetent senior management [snip] like you and unlike AIG managers, I have to work for a living (Bitch PhD)

defending multimillion-dollar bonus payments for the people who run the small division that brought down the company. If the government doesn’t let them have their money, they will walk away, Mr. Liddy says, and nobody else will know how to clean up their mess....

Nothing highlights the fiction of performance-based pay quite so well as retention bonuses. It turns out that, at least for chief executives, retention bonuses are almost entirely unnecessary. (Brad DeLong)

strict limitations on the executive compensation paid by bailed-out companies (
Glenn Greenwald)

It’s much easier to despise these bonuses - and the people who got them - if we can make them all executives and managers, part of that parasite class that doesn’t really work for a living but instead feeds off the sweat of the brow of those who actually do something. However even if you grant that mangers are useless (and I most emphatically do not do so: aggravating, yes; useless, no) it’s not really accurate (or, um, true) to say that only “managers” lounging in their “executive” suites got these bonuses.

Look first at AIG’s Employee Retention Plan. It points out that:

In the first quarter of 2008, AIGFP adopted a retention plan for about 400 employees that provided guaranteed payments to employees if they worked through specified payment dates (or either resigned for good reason or was terminated without cause before the relevant dates). [snip]

AIGFP has gone from about 450 employees in five locations in early 2008 to about 370 employees today.

So of the 450 people who worked for AIGFP in early 2008, 400 signed retention contracts. Does anyone believe this entire division has 400 executives and managers and only 50 “employees”? Furthermore, 80 employees have left. Even if all 80 employees who left were from the 400 who signed retention contracts, there would still be 320 employees left who also signed such contracts. In other words, at least 320 AIGFP employees must have gotten retention bonuses. Not all of them could have been executives and managers. At least some of them must have been actual workers.

The Deal Professor at the New York Times has reviewed the actual retention contracts (he doesn’t like them - be sure to read his whole write-up) and notes something that was also in the AIGFP Employee Retention Plan (emphasis mine):

These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation.

Donkeylicious prints part of an email (again, a must read) that explains why paying the bonuses was necessary. One of his bullet points begins, “Imagine you're a trader at AIGFP.” Not manager, not executive. Trader.

The Washington Post actually visited AIGFP in Connecticut and found both executives and employees to talk with. The employees quoted in the article talked about AIGFP employees leaving if they had to return their bonuses and about how friends and relatives they haven’t heard from in years were calling to say, “'Oh, my God, you work for that place?”

The executives took a broader view. One said:

Guys have worked their [tails] off to try to get value for the taxpayer. This isn't money that's being advanced to us. People have performed the work and done it exactly as we asked them to do.

Gerry Pasciucco is AIGFP’s Chief Operating Officer, brought in by CEO Edward Liddy to close down Financial Products in an orderly fashion:

"Everybody, including my secretary and including the guy down the hall that serves lunch, gets a payment," said Pasciucco, who added that he received no retention payment and has no contract.

Secretary, yes. Lunch guy, yes. COO, no.

You can certainly argue that no one at AIGFP should get any bonuses, retention or otherwise, but it is flatly dishonest to insist these bonuses are only for “executives” or “management”. Such insistence is simply a rhetorical device to further whip up outrage - especially when the writer is contrasting the bonus-receiving “management” with the UAW “workers” whose contracts with the auto companies were renegotiated as part of their bailout.

It’s pretty clear that what really angers most people is not that bonuses were given to useless higher levels but that everyone at AIG makes “too much” money. How much is too much? Two-hundred fifty-thousand dollars, that’s how much. We know that because $250,000 is the Magic Number in H. R. 1586 , “An act to impose an additional tax on bonuses received from certain TARP recipients”, also known as the 90% clawback.

Once I deciphered 1586, the bottom line was this (ignoring the issue of “Married Filing Separately” just to keep things simple):

If your base salary is more than $250,000, then the Feds are going to calculate your additional 90% tax on your whole bonus.
If your base salary is $250,000 or less and your bonus puts you over $250,000, then the Feds are going to calculate your additional 90% tax on the amount by which your income exceeds $250,000.
If your base salary is $250,000 or less and your bonus does not put you over $250,000, then the Feds are going to pretend you didn’t get a bonus and you just pay regular tax on your entire income, base and bonus combined. No additional 90% tax applies.

Short version: if you make $250,000 you’re making plenty and you shouldn’t have gotten a bonus.

This number raises a couple of questions. If $250,000 is plenty of money for anyone, why did the House only claw back bonus money from AIG employees? Shouldn’t it claw back all compensation over $250,000? Under 1586, if any AIG employee makes $600,000 in base salary and got another $400,000 in retention bonuses, the Feds will take 90% of the $400,000 but only the standard amount of the $600,000. Why not slap the 90% tax on everything over $250,000? Let the guy pay the usual tax on the $250,000 he deserves and then take another $675,000 to remind him he shouldn’t have gotten that extra $750,000. He’ll get to keep $75,000 of the “excess” which means he’ll make $325,000. Surely that’s enough to compensate anyone for any kind of job.

And, besides, where did they get the $250,000? (Rhetorical question. I do actually know where they got it but work with me here.) Maybe it’s not enough. If we look at the 2009 individual income tax rates, $250,000 isn’t in the top tax bracket. Maybe we should let people make the $372,950 that puts them just below that top bracket.

On the other hand, maybe $250,000 is too much. Why should the any employee of a TARP recipient make more than national average? If we look at the tax information I dug up for my post on the Federal individual income tax, we’ll see that in 2005 (the last year for which I could find information) the average pre-tax income for households in the Middle Quintile was $58,000. Maybe we should decide that something closer to that number is enough income for anyone. Besides, the average pre-tax income for the Highest Quintile is only $214,500 so, yeah, clearly $250,000 is way too much. Let’s get serious here. Amend H. R. 1586 to insure that no one who works for a company that got TARP money can make more than, say, $60,000 all in. (We’ll round up a little to show our generosity.)

In all seriousness, there is no way I would have approved of any bill designed to take back the AIG bonuses; I would always have believed any such bill to be unconstitutional, hasty, petty, cruel, and dangerously precedent-setting. But if the House bill had said simply, “Any bonus money you get, we’re going to tax at 90%” I could at least have understood the rationale and found it sympathetic if not convincing: the bonus money is taxpayer money and you shouldn’t be getting extra of it at a time when so many taxpayers are hurting and your company is partly to blame.

By adding in that Magic Number of $250,000, however, the House has made it clear that it objects not to where the money came from but to how much people are being paid - and believes it has the right to translate that objection into law. That’s the most dangerous precedent of all.

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