A retention bonus is when key staff are offered a bonus in order that they stay with the company. The reason that “retention bonus” is in the news at the moment is because there are such retention bonuses being paid to the executives and traders at AIG who drove the company into the ground. There is outrage at these payments:

In a letter to House Financial Services Committee Chairman

Barney Frank

on
Tuesday, Cuomo said the top 10 bonus recipients combined received

$42 million

,
with the top recipient getting more than

$6.4 million

.

Cuomo has blamed the unit for the insurer’s near collapse last year. The
attorney general said 11 people who have left the company received retention
bonuses of

$1 million

or more, with one person getting

$4.6 million

.

“Again, these payments were all made to individuals in the subsidiary whose
performance led to crushing losses and the near failure of AIG,” Cuomo said in
the letter. “Thus, last week, AIG made more than 73 millionaires in the unit
which lost so much money that it brought the firm to its knees, forcing taxpayer
bailout. Something is deeply wrong with this outcome.”

Well, yes, perhaps so. Perhaps retention bonuses aren’t in fact what everyone wants to see happening.

New York Atty. Gen. Andrew M. Cuomo has given American International Group
until 4 p.m. EDT today to tell him which employees at the company’s
financial products unit are getting retention bonus payments — and
which executives negotiated those contracts.

In a letter to AIG Chief Executive Edward Liddy,
Cuomo says he has been investigating the insurance giant’s compensation
arrangements since the company’s near-collapse last fall, and says he
finds it “surprising that you have yet to provide this information.”

Maybe Andrew Cuomo is correct about retention bonuses. And maybe he’s a politician on the make (while that normally means that he’s wrong, per se, it’s not an infallible guide). Certainly there’s a lot of politicians and a lot of retention bonuses being discussed:

The seven largest retention bonuses in AIG’s financial products’ unit
totaled more than $28 million, and 22 people got $2 million or more,
according to the letter to Representative Barney Frank, a Massachusetts
Democrat and chairman of the House Committee on Financial Services.

And all of this is part of a must do something now about these retention bonuses:

AIG missed a deadline yesterday that was set by New York Attorney
General Andrew Cuomo requesting a list of its executives who received
part of the millions of dollars in retention bonus compensation the
company just handed out. After issuing a subpoena for the information,
Cuomo declined to comment on any further action against AIG’s Financial
Products Retention Plan until a strategy has been mapped out.

But, erm, is Cuomo simply a politician on the make over these retention bonuses? Is it simply unconscionable that taxpayers’ money should be spent in such a manner? Or is there some really rather good reason why they are being paid? Can anyone come up wioth a reason why retention bonuses should be paid?

Everyone seems upset by the prospect of banks paying big bonuses. What they’re not asking is: why have banks paid them for so long?
The popular answer is that banks need to attract the best talent.
Yeah, right. Eric Falkenstein and James Kwak provide the real answer.
Traders must be bribed not to plunder the firm. If you don’t pay them
millions, they’ll sell the banks’ assets cheaply to rival firms for
which they then go and work. They are paid fortunes not because they
have skill, but because they have power.

Yes, actually, someone can.

Obama is rightly upset about
the size of bonuses handed out when banks are getting a federal
bailout, but not every bonus is undeserved, so it is not as easy as
saying there should be zero bonuses until things are fixed. They key is
how close they were to the decision making process. If someone in
charge of a complex portfolio has his bonus cut back to zero, implying
his future bonuses are also in peril, he has good reason to bolt and
start at a new place. Worse, he has an incentive to screw up his
portfolio by giving away securities to friends of his on the Street
(brokers, other traders he deals with), building up a set of favors for
his next position. Once there, the buddies he sold securities to at 72
when they were trading at 78 will remember him.

The biggest point about business that we all have to remember is sunk costs. In one way, it doesn’t matter how we got here, we just want to stop it getting any worse. If by paying retention bonuses we stop it getting worse then we should pay those retention bonuses. Doesn’t matter what the politicians say, doesn’t matter what the mob has to say about those retention bonuses, pay up and save us all money in the longer term.

http://www.thenewsroom.com/mash/swf/cube.swf?a=V3607477&m=806386
http://www.thenewsroom.com/mash/swf/cube.swf?a=V3653713&m=806388
http://www.thenewsroom.com/mash/swf/cube.swf?a=V3653638&m=806390