The Business Ethics Blog

(By Chris MacDonald)

Chris MacDonald

Chris MacDonald
Location
Canada
Birthday
January 12
Bio
I'm a philosophy professor who specializes in business ethics. My blog (businessethicsblog.com) is about business ethics. I also blog occasionally at researchethicsblog.com, biotechethicsblog.com, and food-ethics.com.

MY RECENT POSTS

Editor’s Pick
MARCH 16, 2009 2:20PM

A.I.G. Bonuses, Ethics, and the Rule of Law

Rate: 21 Flag

It's not unethical to pay people money you are contractually obligated to pay them. Even if doing so makes you, or other people, want to pull your hair out. It's the right thing to do. Not always because the person getting the money deserves it, in some abstract sense, but because you promised.

From the NY Times: A.I.G. Paying $165 Million in Bonuses After Federal Bailout

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year. Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them....

You don't have to like it, any more than you have to like providing state-appointed attorneys to child molesters (not that I'm comparing...well, you know.) Anyway, the point is: there are some things a civilized people governed by laws (rather than by the passions of the moment) have to uphold. The right of the accused to assistance in his defense is one; the right to speak (even if what you say is abhorrent) is a second; and the fulfillment of contracts is another.

The key source of outrage here is the fact that A.I.G. execs did such a miserable job, and yet are being rewarded with public money. Isn't that worth violating even legally-binding contracts? Two points need to be made about that.

First, let's not forget that although there is surely plenty of blame to go around within the walls of A.I.G., it's highly unlikely that every single one of the people who is owed a bonus payment was derelict in their duties. I'm not sure it's fair to want to punish everyone.

Second, if people are owed bonuses despite having done a lousy job, that means a mistake was made when the bonus system was set up. Putting appropriate incentive structures in place is, believe it or not, a challenging corporate governance problem. It looks like bad choices were made in setting that system up at A.I.G. And, unfortunately, those are bad choices that the U.S. taxpayer inherits (along with many others, no doubt) as the new de facto owners of A.I.G. It was a miscalculated (perhaps inept) promise, but the solution is not to renege on that promise now.

Your tags:

TIP:

Enter the amount, and click "Tip" to submit!
Recipient's email address:
Personal message (optional):

Your email address:

Comments

Type your comment below:
p.s., nothing I said above implies either a) that some or most of the people receiving those bonuses should not feel ashamed of it, or b) that Obama should not be wagging his finger as he currently is. I would do the same in his shoes. It's futile, but necessary. There's no contradiction in chastising someone while you pay up.
Chris, I agree with the premise of your post. I worked for a Fortune 250 company in the early aughts where the CEO to the company took from 460 per share to $5.99 a share and was fired and collected his 20 million dollar severance package.

Was I outraged? Yes. Did I think this was wrong? Yes. Was there a remedy? No. Not as long as the board of directors approved such an employment contract. You can question the intelligence of the board to enter into such an agreement.

If you are a large institutional shareholder you can demand changes to the board and to its compensation committe policies. Perhaps that what the US government should do with the AIG board? I don't see it happening.

that what is so sad.
Aaron:

Thanks for your comment (and no worries re the typo!)

I'm not sure (not skeptical, just not sure) whether the parallel with union contracts is right. Those were renegotiations, weren't they? Admittedly, renegotiations under some duress. It's my understanding that bankruptcy also allows a way out of contracts...but that's a pre-existing legal exemption, rather than an ad hoc decision to simply break a contract.

Chris.
To be slightly off-topic, you don't provide an attorney to a child molester, you provide an attorney to someone who has been accused of molesting children, and is not necessarily guilty.
business ethics? would that be like whore's virtue?

but you are right, if you're not going to fix the whole system, you have to smile and hand over the cash. no letter of recommendation, mind you...

that's why "change you can believe in " was believed only in river city.
I worked my ass off for a media company that did NOTHING wrong, and due to the economy I didn't get my 20% bonus, which I was counting on.
Oh yeah, we also had to take a 5% salary reduction this year. AIG execs should be drawn and quartered.
I really appreciate your even-handed reporting of this. I can particularly understand your argument that laws don't need to be changed or broken because of the passion of them moment (even when that passion is well justified).

I guess my distaste for this whole argument, however, comes from the fact that it seems too often, as an ordinary (and often powerless) citizen I'm given the same answer. When I screw something up, I have to pay for it...and when AIG and others screw up, I still have to pay for it. For eight years, we've listened to an administration that said they supported an ownership society that took personal accountability...until they're called to do so.

My wife's bank once accidentally double withdrew money from her account. When we reported it, we were told to fill out paperwork and the investigation could take up to three months (despite the fact that we couldn't afford to be without several hundred dollars for three months.) Their reply..."There's nothing we can do about it."...BULLSHIT. My question is, when do we get to say that back to them?

Yeah...I'm a little bitter...but I still see your point. I'm just tired of hearing it and buying into the argument that we're powerless. Rated.
Aaron:

The Public D posting is long, and mostly about a 2007 renegotiation, and the connection between VEBA and derrivatives. Maybe I missed the relevant part.

If the point is just that a double standard has been applied, I need to know a) by whom, b) are there no relevant differences, and c) why the solution is to resolve the contradiction by moving towards more violations of contracts, rather than fewer.

Chris.
Ryan:

You're mostly right, and that helps my point. You provide lawyers to people *accused* of child molestation (but you would also provide one even if you were fully certain of what they did, e.g., if they had confessed).
The point is that in that case, and in the present case, it's worth defending the principle even if it stinks.

Chris.
There were no strings attached with the bailout money, remember? And why are they going after those receiving the bonuses and not those handing them out? The whole things shows the complete idiocy when the government gets involved. They never should have gotten bailed out in the first place, I don't care what Bernake says. rated.
Maybe this is my own ignorance of business contracts but I am having a tough time understanding why government (taxpayers) money should become the bonus money paid to executives that screwed up and caused the company the need for the bailout. If AIG had not been bailed out by the government (taxpayers), there would be no money to reward bad executives who ruined the company. I liken this bonus to rewarding the child molester, if we are going to use that analogy.

If AIG had not been bailed out, AIG would have failed and the execs would be unemployed not getting bonuses. This kind of use of bailout money should not be allowed by the government. No accountability is in place for either the bailout money or the executives. I was adamantly opposed to the first big bailout of the previous administration, and all the subsequent bailouts; and this scenario illustrates why others and myself have been and are opposed or at least, concerned.

This is a colossal travesty that has no ethical base. You are the ethics scholar so I am trying to understand your point and I do respect your opinion but the government money should be used to do damage control and get AIG afloat again; not line already padded pockets and pay for frills and bonuses. Us, the vast and becoming poorer by the minute majority are the ones that are economically suffering. Regardless of what our myriad political positions and social persuasions are, we all do, and will continue to have one thing in common, being economically pinched and strapped.
It would bother me a lot less if pink slips were attached to the bonus. I can't imagine an employment contract that didn't allow a poorly performing employee to not be terminated for such. As for the board that hands them out I would suggest that new directors be culled from homeless people and ner'do wells off of the streets, at this point I don't think they'd do any worse and at least you know what those guys are about.
Leonde:

My point is just this.
AIG was in trouble. The US government intervened by giving it a bunch of money. One thing AIG needed to do was pay its expenses. That includes things like rent, utilities, computer equipment, consulting fees, salaries, and ...contractually required bonuses. Legal requirements -- which is what fulfilling these contracts amounts to -- should be considered unavoidable costs, not luxuries.

So, I think it's misleading to call it 'taxpayer money being used to pay bonuses.' It's 'taxpayer money being used to pay expenses.' One of those expenses is (unfortunately) bonuses that it seems ought not to have been promised in the first place.

Please, everyone, don't get me wrong. I think it's crappy. If I were Obama, I'd be looking for legal loopholes, too. But I think the crappy decision was made by those who set up the ill-thought-out bonus system, rather than by those who are honouring the obligations.

Chris.
Barney Frank has pointed out thar while the AIG executives may indeed have a right to their bonuses, they don't have any right to continue in their jobs. Like everyone else without a union contract or tenure, they are hired at will and may be fired for cause. Cause here is pretty evident and as the eighty percent owner of AIG, the government can and should dismiss them. Now the question becomes, as ex-employees do they still have a legal right to those bonuses? Maybe yes, maybe no, but the government should put these guys through the mother of all extended legal proceedings to find out. If these executives are eager to torture the American taxpayer with jurisprudence, we should torture the executives with adjudication.
Contract or no contract, it's wrong to do it with our money. I know there are buyouts of contracts, even when people are let go from companies, including school districts. Caterpillar is a Fortune company, and I believe the execs' bonuses have been cut along with their salaries. What is the difference?
I scanned some of the comments, but don’t have time to read them all at the moment. I just wanted to point out a discrepancy between “ethics” and “laws”, or “ethical” versus “legal”. They are not necessarily mutually inclusive concepts.

It may be illegal, but that does not necessarily mean it is unethical. When one considers all of the unethical practices that occurred to create the current dilemma, one has to wonder where we draw the ethical line with giving these organizations breaks.
Libertarius:

Agreed, 100%. Each of the senior AIG people should be scrutinized & those who didn't do their jobs should be fired.

Middleagedwomanblogging:

"Buying out" a contract is not the same as "breaking." As for Caterpillar, I don't know the case. But I know that execs at some firms (very honourably, and perhaps wisely) have *voluntarily• taken pay cuts, declined bonuses, etc.
Chris, no the union contracts may be broken by a bankruptcy court. Presumably, if AIG went into bankruptcy, they might be broken as well. At least it would be put on the table, of that I am sure.

I think more will come out on this story. I have a sense that some of the bonus terms were granted after AIG knew it was in trouble and they felt they had to pay the individuals in the know to stick around and help sort it out.
Contracts are broken all the time. Who cares if this one is broken, too? Are those people who were promised fat bonuses going to sue the U.S. Government if they don't get those bonuses? Furthermore, why weren't specific stipulations written into the bailout terms when it occurred, stating that NONE of that money could be used for performance bonuses? "You want money to stay afloat? Great, here it is. You need money for performance bonuses, too? Find it somewhere else."
don't you think the congress and the senate bear some of the reponsibilty? namely, congressman frank, and senator dodd. aren't these the guys who have been asleep at the wheel? i suppose some of the problem is from tarp 1 so i guess you could say former secretary paulson was to blame. and the tarp 2 funds fall right on secretary geithner. i suppose the media will spin it in to "we inherited balh blah blah." did anyone even read any of the bills with billions and trillions in them? i doubt it. what a bunch of bullshit. with all the transparency going around we can see that the democrats are just as naive as the republicans. with the extra added bonus that we can see taxpayer money vanish before our very eyes in real time. 2010 can't come soon enough, when hopefully many of these career politicians will be tossed out on their asses.
Yup. When the Governement starts messing with contracts--including those marriage contracts that were signed in California--we have trouble.

On the other hand, this would't be the first time a bully is embarrassed into right behaviour. So: Rahm and Barrack, go talk to them, tell them to give the money to the poor, or to people in jeopardy of losing their homes, or to the symphony or museum (as they should have been, all along). But dont' try to take it away or a lot of other stuff goes along with it.
I understand your argument, but I simply don't believe that bailout money should be used to pay the bonuses. The taxpayers didn't make a contract with these thieves. The bailout money, if paid at all, could be paid with a restriction on its use. Let AIG defer the bonus payments to some time in the future, however long it takes, when they produce enough income on their own.

BBE - I signed the petition.
Chris - as mad as I am I have to agree with you - but I think there could be a satisfactory answer to those of us who put up the money for these heartless bastards. I have written a short post which I hope gets a little traction.
Thank you for writing this. Rated
Pay them out of their own G D money, not my tax dollars! A bonus is suppose be for productive work, not bankrupting a company.

Thank goodness "blank check bush" is gone off into some drunken oblivion.
Let me take a shot at a few of the replies.

"When the federal government sat down with the three largest American automotive companies for loan payments, one of the first actions they forced on them was re-negotiating contracts with the unions. Are those contracts less legal then the ones that hold these AIG execs deserve their money?"

The monies paid are for past services. The new union contracts for the automakers will be for future services. They got paid what they were owed. If they don't like the future contract they can leave. The union members lost no money that was due to them.

"Public money should not be used to pay these bonuses no matter what the contracts say."

We take a large bucket and both of us dump in water. How do we take out only your water? AIG had cash flow. It may not have been enough, but they had some. So how do you know which dollar got used to pay the bonus when it went into the checking account?

"If AIG had not been bailed out, AIG would have failed and the execs would be unemployed not getting bonuses."

If they would have gone in to BK as the court got money one of the first things the courts would have done is pay past due wages. These bonuses would have been past due wages and would have been paid just like the janitor's salary.

"American taxpayers now own $80% of AIG after paying $173 billion to keep it afloat. "

Slightly off topic, but would somebody show me in the constitution where it says that the government can own and operate a publicly traded company? Where is their authority to decide who to bailout and who to let fail? Where is their authority to do bailouts at all?

"Are those people who were promised fat bonuses going to sue the U.S. Government if they don't get those bonuses? "

IMHO, yes they would.


Just my shot at some of the replies posted above.

BTW, the bonus money is only 0.9% of the money loaned. According to congress nobody
cares about 1.9% in pork on the budget bill. Why the outrage?
If the White House is unable to stop the AIG bonuses legally, it should at least have the clout (owning 80% of the company) to demand a public awards ceremony for these very high-value talents -- perhaps at the White House. Mr. Liddy, as CEO, should read the citations, one by one, telling the world of the contributions each awardee made to the company. Then 1-2 minutes for each bonus taker to speak, perhaps sharing the thrill, or thanking "all the little people" who helped. Then to the President of the United States for some closing thoughts. Any legal impediment to that?
Jack:

LMAO! Now *that* is a good idea. :-)

Well, except for one thing, and this applies to any name-and-shame scheme...
It requires us to figure out, with some certainty, who actually deserves to be shamed. Otherwise, you're painting them all with the same brush. Tempting, when angry, but not justified.

It's not clear to me that each-and-every-one of the AIG people who have bonuses coming to them. So you'll end up naming-and-shaming some innocent, hard working men & women, too.

Chris.
When a business goes under, they routinely default on their contracts and their financial obligations....frequently leaving employees and vendors without any recourse....the only reason that these empty suits still have a job is because of taxpayer money....had private equity investors stepped in to bail out AIG instead of the government, you can bet that they would have insisted on a suspension of all bonus money as well as new managment as part of a plan to turn the company around....why should we as taxpayers not have that same right?....this is not about ethics or honoring contracts.....the same voices that raise that argument are frequently the ones that call for "give backs" by unions....

As far as i am concerned, AIG ran a criminal enterprise, essentially functioning as bookmakers without the resources to pay off if they lost......it is disgusting that the bailout money is not being directed directly to those who are owed the $$by AIG....instead of being filtered through them.....

Mr. McDonald reads more like an apologist hack than an authority on ethics.
I am somewhat disgruntled at the idea of people at AIG receiving bonuses when they have received taxpayer funds, but I agree that there's a legal obligation to pay wages (including bonuses) already earned. I don't want the government unilaterally voiding private contracts. I do think that, if a legal loophole cannot be found, people at the top should be shamed into not collecting their bonuses. That may sound naive but there are a lot of businesses in trouble where the top executives have agreed to reduced compensation in these extraordinary times.

One thing I haven't seen people talk about is who the money is actually going to--as I understand it from an article in the NY Times yesterday, less than 10% of the money was for "top executives"--that means a lot of the money was probably going to regular employees. In a lot of financial services jobs, people depend on their "bonus" as an element of their compensation.

Lastly, everyone talks about AIG as "crooks" as though they broke the law. What happened with AIG was a catastrophic failure of regulation. As a layperson (with regard to credit default swaps) it's hard for me to assess how foreseeable this was--and I find it hard to believe that all the people waiving pitchforks know better than I do.
Great post. Really sad isn't it though. I just wonder if a ways down the road, the media finds out that someone or several folks had their pockets lined. Wether this is a huge scandal some day.
Michael:

Does everyone you disagree with sound like an "apologist hack"? Do I only get to sound like "an authority on ethics" if I say things you agree with?
I have no stake in, nor particular interest in, either AIG or the financial industry. I'm an apologist for no one. I'm presenting reasoned arguments. Like this one:

You said "When a business goes under, they routinely default on their contracts."
True, sometimes they do so illegally. That doesn't make it right.
And sometimes they do so under the provisions of bankruptcy law. That's within their rights, according to laws put in place to serve a public goal.
Ad hoc breaking of contracts just to punish people we *think* may have done something bad (many did; some didn't) is unethical.

Chris MACDonald
It's simple: you fire incompetent people. Then you don't have to pay them bonuses. Put me as the head of AIG, I'll put the fear of God into them. I'll fuck 'em for stealing a paper clip.
Good post. A needed counter-balance to all the emotional decision-making that got us into this mess with AIG.

GordonO wrote a good post about how the haste to bailout AIG made these situations more likely because constraints on bonuses weren't negotiated into the package.

I'm with Catnlion on answers to most of the objections. One exception: Had AIG gone into chapter 11 bankruptcy protection, the judge would have had some authority over these payments. So, a little more thought up front might have created a situation where the company remained private but in chapter 11 and the normal court processes would have controlled. But, some of this would have depended on the legal structure of AIG and how much of its liabilities were under US law versus non-US law. The US is unique in having chapter 11 restructuring.
Catamitebastard:

Are you sure about that? Really?
You don't sound sure.
Maybe you should show your work, so we can see how you arrive at that tentative conclusion.

Chris.
Chris,

It's absurd to assume that "Everyone that disagrees with me is an apologist hack"....there is always room for respectful disagreement....I find that your position is either ignorant of the legal and ethical options available to (we) taxpayers as owners of AIG. or a cynical attempt to provide an "ethical" spin to both a morally and financially bankrupt behavior on the part of these incompetent bastards that brought the system to its knees.

Where were the ethics of these brilliant financial captains that created this mess?....Also, do not lose sight of the fact that a bonus is a bonus....how could this money possibly been earned by any employee of a failed enterprise?.....these people worked for a criminal enterprise.....
No the government shouldn't advocate or be party to breaking valid contracts. They certainly should be reviewing the contracts with their counsel to see if they are invalidating in any way by the bailout. And they should make receiveing future funding contingent on good behavior and renegotiating compensation packages. (And/or as majority stakholders break this and other entities too large to fail into smaller businesses that fit more neatly into regulatory boxes at least until we can get up to speed reregulating the industry for their own good and ours.)
I think the other issue is that the funds that went to AIG were part of the first Paulson mugging, I mean bailout where he stomped his feet and got really upset that Congress had the temerity to issue any conditions at all on the money he demanded. We could have had conditions on the bailout itself that necessitated renegotiating of employee compensation packages. But that was before the big 3 autos also came with their hands out, before the wider stimulus package and before another 650 million jobs lost so they got away with it in that one.
On the other hand AIG has been incredibly tonedeaf to the situation- first with going ahead with the big gala and now this. They should have gone out of their way to mitigate the damage here by getting out in front. They should have had all of their execs commit to not accepting their bonuses and they should have had their people sign new contracts that were dependent on performance (and paying back the government!) for future compensation- offer new reduced compensation or the full amount due contractually with a pink slip. Deperate times call for desperate measures - those actions wouldn't break the contracts and would force the titans that have contributed to the layoff and forclosures of hundreds of millions of people to live with less than they expected just like the rest of us.
Michael W:

You're simply ignoring all the arguments here.

Obama is a very smart guy. And a law prof. If he hasn't found a legal means to get out of these bonuses... well, then I don't feel too ashamed of being "ignorant" of such options, because they likely don't exist. If he finds them: awesome.

As for "Where were the ethics...." I don't see how that's relevant. This isn't kindergarten. Clearly people at AIG acted badly. That doesn't mean that further unethical behaviour is the solution.

CM.
Chris,

You appear to need to have the last word, so go for it.....don't believe for a moment that your position resonates to any sophisticated ear....you are correct, this is not kindergarten....precisely why your words are hollow.
Mr. MacDonald, a self ordained "Ethics Professor"....I think i will anoint myself the new "Pope of Eroke......
Chris,
Why are you afraid to put the responsibility where is should lie? Geithner and Obama are simply continuing the missteps of the Bush bailout strategy, ... hand out billions without prior agreement to the use of funds.

The A.I.G. bonuses are also the least of the concerns on their use of the cash. Check out Where A.I.G. is in turn applying the billions it is receiving from the American taxpayers. Geithner was also the one involved in bailing A.I.G. even before Obama came to the White House.

Pandering to Obama and Geithner is simply not appropriate, and is misleading.
Simply a moral hazard and a serious attack on Nicomachean Ethics.

I'm surprised at the Professor.

On this note, you must see that the ethics involved in the processes from saving AIG - which if left to fail, would afford no counter-party bailout of $160 billion (Goldman Sachs - Henry Paulson's alma mater to the tune of $12.9 billion; Barclays $8.5 billion {Lehman's successor in IB}; Deutsche Bank $11.8 billion; Societe General $11.9 billion; Royal Bank of Scotland; Merrill Lynch; Bank of America; Morgan Stanley; and HSBC). There would also be no banking system, no easy recovery and... NO BONUSES.

Lehman was let to fail and there were... NO BONUSES, just a blow out of top executive pay leading up to the failure.

Aristotle wrote - Book V: "It is plain, then, what the equitable is, and that it is just and is better than one kind of justice. It is evident also from this who the equitable man is; the man who chooses and does such acts, and is no stickler for his rights in a bad sense but tends to take less than his share though he has the law oft his side, is equitable, and this state of character is equity, which is a sort of justice and not a different state of character."

Granted the Government here really screwed things up in legislative failure. To wit, they further screwed up in Oct. 2008 when they restricted, by contract under TARP, the taking of bonuses and lifted the restriction in Feb. 2009 to exclude only the top 25 executives from taking of bonuses.

Nevertheless, all things equal... NO BONUS.
The fly in the ointment, I think, is that bonuses are usually based upon performance. If it is merely deals closed, rather than the actual value of those deals, then there is something wrong.

And there is no explanation why these folks were not fired for signing up bad deals and obligating AIG to pay out a lot of money on derivative stuff that had it been investigated would have been determined to have been unworthy of the policies which they were applying for coverage. In fact, it could be determined that these very derivative securities were fraudulent and obligated AIG in ways that it wouldn't be able to ever meet.

Why didn't they fire them, sell off the unit for peanuts or do something to protect itself? Because, probably, it was covering the fraud itself.
Michael W:

"Self ordained?"
I'm not ordained. But the university where I'm tenured are to blame for making me an ethics professor. If you want to question my credentials, you should at least look them up, first.

Chris.
The American people have been entered into a "contract" with AIG wherein we are supposed to loan them billions so that they can pay their obligations and solve their liquidity crisis, not so that they can make it rain at strip clubs and snort nosecandy.

No citizen in their right mind would vote yes on a proposition to reward these scum for their gluttony with 40 acres and a mule so that they could barbecue the mule and chase golf balls around the 40 acres in checked pants.
Dean:

I see no reason why enforcing legal contracts implies moral hazard.

As for the quote from the N.E., I'm not sure I see the relevance. I suppose it provides advice to those who are *accepting* bonuses they don't deserve. Surely, those people should be ashamed. But nothing in that passage suggests that arbitrarily reneging on a promise is appropriate.

Notice that I'm also NOT defending the A.I.G. bailout. I'm just saying once you buy a rotten house, you inherit the roof, too.

Chris.
Chris, do you have any thoughts about the prospects for eliminating non-performance-based bonuses, which I presume that these must be? I imagine that these are probably standard practice, but like CEO salaries that don't really have any built-in safeguards against complete incompetence, it sounds like a bad (if pervasive) thing in general...
Rob:

Good question. I don't know a lot about executive compensation. What I do know I learned from John Boatright, who teaches at Loyola. I know that over the last 20 years, the move has been very much towards performance-based bonuses. But I gather that it's a rather tricky business. You want bonus schemes that give people incentives, but you also need to get them to focus on the right time-frames. You also need to think about WHICH things to incentivize. Building long-term shareholder value is good, but it's not the only good thing. Finding the right blend, I take it, is tough. I think it's a genuinely hard problem. Of course, there's also the fact that sometimes bonus schemes are set up by insiders to help their friends; that in itself is a corporate governance problem.

On the problem of performance incentives generally (not necessarily at the executive level) I recommend "The Modern Firm," but John Roberts.

Chris.
Thanks for responding. I see your point, but find reason to avoid such a contract and the grounds of which to form such avoidance or as most would agree in the plaintiff bar, force settlement for 1/3 (and that's a win for the rubes).

Here's my take on the whole contract thing... Sovereign Immunity.

Let the first guy take his case to court and third party the U.S. Government in a case (where it owns 85% of AIG) for breach of contract.

Professor, I've sued the Government as a third-party and it is quite a facinating experience to have lasted as long as I did in my case. Mine was a breach of contract case and even more so, unjust enrichment. While contracts, indeed, are held Stare Decisis by the Sup. Ct., the President can simply tell the rubes to "roll the dice and take your chances."

As for me, I'd simply be happy to keep my job at this point.
I wonder if you would be saying this if you were on that edge of the hole, actually falling down never to be able to get up again, clawing at something, anything that could perhaps save you from hitting the bottom. Because you know that if by chance you hit it that would be the end not only for you but also for your children and their children and then their children as well.So you beg and borrow and steal and bend your knees some more just to not hit that end.
One can afford to have "discussions" about the "right and "wrong" of contracts when one is surviving. The rest have far more pressing issues.
So give them their bonuses and wag all the fingers, and wonder about the "goodness" of contracts. Meanwhile it is our brother and sister falling into the abyss.
I'm a little confused here. Is AIG openly admitting that its bonus structure is not linked to performance of the individual or the performance of the company? I've worked for 3 Fortune 50 firms, at the executive level, and I've never personally experienced a compensation scheme that was not applied as a direct result of measureable performance - mine and the firm overall, with the latter prevailing.

That sure looks like the argument AIG is making - that bonuses are a matter of contract, and that payout on the contract is not based on a classical pay for performance paradigm, but rather a fear of lawsuits.

I suppose it's not surprising that a company bent on handsomely rewarding the leaders who drove it into the ground would be a failure needing a bailout. It's funny in epic proportions that the first people with their hands out for bail out money are the people who made the bail out necessary. I guarantee you that bonus money isn't be spread liberally across the entire breadth and depth of the company - nope, I'd wager my house and lot that 80% of that bonus money is going to a pretty small percentage of the executive staff.
Traveller1:

You're talking to a mirror, right?
Because you're on here, discussing it with the rest of us.

But besides that, are only the destitute able to make a point about right and wrong? Shouldn't we all be glad that some people aren't destitute, and hence -- frankly -- have the time to consider what might actually be the right thing to do, rather than just throwing darts at a dart-board?

Chris.
Sandra:

I don't know the answer to your question, but if anyone does please let us know.
I think you're right about the bonuses being focused in the upper echelons.

Chris.
Susanne:

You're right, bonuses are usually based on performance.
I'm taking it for granted (because I assume Obama & his team have already verified this) that the bonuses *are* owed, according to the terms of the contracts. I could be wrong about that.

I also agree (as I did with another commentator who made a similar suggestion) that paying the bonuses, as per the much-maligned contract, is 100% consistent with the option of firing anyone who truly deserves to be fired -- which just might be a lot of people, from the looks of it!

Chris.
From my point of view these leeches should have been fired when AIG needed the first bailout. That would have cut short the term for which the bonuses were owed, they could have fired them for cause: all deals are not equal. These deals were bound to cause AIG to fail and it is reasonable to assume that they knew, or should have known, that they were doing AIG and its shareholders wrong.

Somebody should sue them all.
Chris, I just want to go on record as saying I hear you and there's some superficial logic in what you say, but I simply don't agree that this is sufficient. I wrote a long reply but it was crowding up this little comment box, so I cut&pasted it away to a safe place and will publish it as a post of my own in rebuttal sometime hopefully this week.
Cindy:

Thanks for the pointer to Greenwald. If, in fact, the contracts are subject to legitimate legal challenge, then that's arguably a happy thing.

But again, I just don't know whether ALL of the people who are (apparently) owed bonuses are in fact villains who ought to be taken to court. Given how widespread the problem must have been within AIG, one wonders whether a case-by-case investigation is feasible.

Chris.
so, now in response to Cindy's point....your position is that ethics should be subject to practicle application?.....Chris, your position falls out the window and into the garbage where it belongs....
Michael W:

Yes, ethics is -- setting aside philosophical, theoretical work in the area-- largely a practical discipline. I write a blog on business ethics. It's about ethical questions that arise in practical domains.

What we ought to do, how we ought to behave, depends on how the world IS.

My original point was about upholding legal contracts.
If it turns out the contracts aren't legally binding, then it's not probably not unethical not to uphold them.

Assuming, (I think I've said this twice already) that all of the people who are getting bonuses actually are undeserving. Otherwise, in chucking the contracts, you're penalizing the innocent, along with the guilty.

Chris.
I agree with your last statement. I think there is fraud involved here, and that always voids a contract.
HP recently cut salaries across the board, though I am sure it has contracts in place with most if not all of its employees.

A year ago I was at a company that was experiencing some unexpected downturn - all bonuses were summarily eliminated, no exceptions.

I don't think any one in either situation tried to make a case that these companies were unethtical. None of us were thrilled, but we recognized the value and importance in taking measures that allow more people to keep their living wage jobs than a few people to keep their ungainly bonuses. Not a single person brought a lawsuit against the company I was at; if HP is fearful of being taken to court for reneging on its contracts, I have yet to read about it.

In AIG's world, these companies are behaving unethically. What a topsy turvy world AIG would have us believe in - a company that eliminates bonuses to keep jobs and protect the overall health of the business is unethcial and should be sued, while a company that keeps ginormous bonuses even in the face of catastrophic profit and job loss is virtuous and honorable.
In his letter, sent to Edward M. Liddy, A.I.G.’s government-appointed chief executive, Mr. Cuomo said that he had investigated the insurance company’s compensation plan since last fall. The attorney general is seeking the list of employees who will receive these bonuses, as well as their job information and performances. Mr. Cuomo said that the company had failed to heed a previous request for this list.

He is also demanding the contracts guaranteeing these bonuses and the names of individuals who developed and negotiated the agreements.

Chris: The outrage that's sweeping the country is a lot like a hurricane. You can choose to look at the hurricane from a distance and analyze it that way. That, it seems to me, is what you're doing here, and I have no doubt it's accurate.

But it doesn't move me. I'm not looking at it from a distance. I don't have tenure. I'm in the midst of the hurricane and that's not a pretty place. All I can muster is outrage. I think that's where most people are right now and I believe it's completely justifiable.

You may even share most of these feelings -- for feelings, rather than theories are what they are. And feelings are volatile things. And though it may look like mere anger, what's working on people are the more sublime and all-American expectation of fairness and justice. This, I think, is a hopeful thing.

I'm hoping the outrage will translate into the forging of a political solution that addresses fairness and justice, not a legal one that effectively shrugs its shoulders and says there's nothing to be done -- no justice to be found. Justice demands a re-balancing of the legalistic forces that you so deftly present so that AIG's taxpayer / owners have as much to say about the business we've been forced to buy into as AIG's self-protective executives have had to say.

I wrote about my feelings here on Sunday. My sentiments were reflected in the hed: "AIG to USA: Drop Dead" Since your analysis can lead only to an abstract appreciation of the legal ramifications of somehow stopping this idiocy, it's very easy for me to dismiss them.

In contrast, I found the commenters who were struggling with their feelings, their confusion and their dismay to be invigorating. They know they're getting shafted and they want to do something to correct the situation.

I for one am signing Behind Blue Eyes's petition and will pass it around my small circle of friends in hopes of justice being done.

In the meantime, I'll pass along this note from today's New York Times, concerning State Attorney general Andrew Cuomo's attempt to perhaps find a political middle way between the legalistic and the emotional routes we've all essayed tonight. Andrew's a showboat of the first order, but I think he's on the right track. He's trying to get the names, addresses and performance reviews of the bonus babies and he's questioning the legality of the contracts as well.

“Taxpayers of this country are now supporting A.I.G., and they deserve at the very least to know how their money is being spent,” he wrote in the letter. “And we owe it to the taxpayers to take every possible action to stop unwarranted bonus payments to those who caused the A.I.G. meltdown in the first place.”

Rated
Chris,

At AIG and the related institutions there are those that are guilty and those that are ignorant...neither should be rewarded with a bonus.....regardless of any theoretical, abstract idea......
Chris: I read your blog earlier in the evening, but was unable to form a response until now. Part of the reason is that superficially I agree with some of your statements, such as the law is sometimes an ass, but must be upheld. (I realize you did not use those words, but is essentially a summation of what role the law plays when forced to back up ass-like behavior, such as the A.I.G. bonuses.)

What confuses me is that you write about ethics, but all your arguments are about the legal issues. In your opening sentence you mention the “rightness” of honoring the A.I.G. bonus contract by stating: “It is not unethical to pay people money you are contractually obligated to pay them.” True. I’m sure a person who hires a hitman might feel ethically bound to pay the person who makes the hit, especially if a contract is drawn up. Even the court that tries him for taking out the hit might admire his “ethical” behavior in making sure the hitman got his money, but his "ethics" will not keep him out of prison.

Which brings me to my main point. Contracts and laws are cast aside or broken routinely in order to either make case law, or force change in the law. U.S. lawmakers resisted throwing out miscegenation laws until couples started ignoring them. When one couple consented to take the issue to the courts by openly violating it, the law was declared unconstitutional.

There have also been instances where contracts were deliberately violated in order to test their legality or to make case law. One example in my state was when a health insurance company hired an attorney to refuse all benefits to one spouse of a randomly selected couple in order to establish case law about health coverage in cases where both spouses carry health insurance. I am sure the couple selected for near bankruptcy had some questions as to ethics of selecting them to be hassled in such a way since they did nothing wrong, nor did they violate any law.

One of the arguments the health insurance company made was the law did not cover the new circumstances of the times, i.e. that many couples each had health insurance and there was no law guiding them in regards to which insurance company paid out benefits in the case of minor children, or which insurance company got the first submission for benefits.

I think A.I.G. could find a way to get out of their contract using the “things change” argument. The government could delay the bonuses by claiming they need to investigate the possibility that
the bonuses are payoffs to keep their executives mum about past illegal activity. I don’t think either of these things will happen, because they don’t want them to.

ETHICALLY speaking, I see no contradiction with A.I.G. or any other corporation refusing to pay their bonuses. You cannot parse out ethical arguments. If your upper tier executives deserve ethical consideration, then all their employees deserve the same ethical consideration or else the whole argument is absurd. For the past 20 or 30 years corporations have violated every ethical standard in the book when dealing with the “average” worker and even their customers. They’ve also broken the law thousands of times in regards to employee law. The average person mostly has to just take it in the chin, because the expense and retaliation of hiring a
lawyer is too prohibitive. Most companies count on this. The only thing that gives pause to a company violating their "ethical" standards are multi-million dollar settlements. Why do you think the Bush administration tried to put a cap on these? It’s all well and good to claim a future ethical path, but I don’t think A.I.G. should be surprised if most think their “ethical” argument is a bunch of hooey. They are giving the bonuses because they know they are dealing with people who might very well sue them. That’s it. That’s all. No ethics involved here. A.I.G. might win this one on the legal issues, but it will be a phyrric victory.
Chris, given the information that we have this discussion seems to be a whole lot of conjecture. There seem to be a whole lot of ifs going on. Given a particular set of circumstances your argument may have some merit. I do wonder though when you say, "Assuming, (I think I've said this twice already) that all of the people who are getting bonuses actually are undeserving. Otherwise, in chucking the contracts, you're penalizing the innocent, along with the guilty." I think there are some holes in your argument. Either you are talking about legal rights that should be honored to uphold a system (and let's not even get into the amorality of that system), personal ethical considerations (we better serve ourselves when we engage in ethical behavior), or issues of fairness (penalizing the innocent along with the guilty). If as you say at the beginning of your post we should do something because we promised then you are conditionally correct. If a promise was made in good faith and reasonable expectations were met then yes you should keep your promises. However if reasonable expectations were not met then you would have every right to change your promise. If I learn that someone has cancer and has financial problems due to their medical bills and offer to give them fifty dollars a week to help and find out later that they are A) cancer free and still taking the money or B) better off financially than they represented themselves to be and say giving lavish gifts, I have every right to alter my promise. This same line of thinking would apply to the "honor your word because it is good for you" argument. Doing what you say is of great benefit unless of course you said you would do something stupid in which case the personal benefit of keeping your word might be outweighed by the personal benefit of keeping your life, maintaining your family etc. If your argument is that someone who is deserving of a bonus may not get one then there is a need to weigh the benefits (read rightness) of those people getting what they deserved against the benefits of the bailout investors getting what they deserve. You might argue that on legal grounds they are due their bonuses and you might argue that on ethical grounds that they are likewise deserving but you can't argue that the arguments prove each other. Legal decisions are many times unethical and ethical decisions can likewise be against the law. (slavery) At issue here is probably the word bonus. Compensation is frequently given in the form of a bonus for tax reasons and may not actually be linked to performance. What confuses the issue for many of us is the fact that the word bonus means extra. So when we non business types hear about someone getting extra money when we know damn good and well there aint no such thing... well we do a little moral calculating ourselves and weigh the moral good of expecting those who are in control of billions of our dollars to be MORE moral than we are and respect the gift of our money MORE than a necessarily hasty agreement. This is when the real problem of your argument comes to light. You are making an ethical argument and only asking one side to be ethical.
"To live outside of the law, you must be honest....you know you always said that you agree.".....

That is a Dylan line that sums the entire bullshit argument up.....laws are mean't for those with larceny in their hearts....if you are honest you don't need a judge to tell you what to do....the AIG people are criminals.
"What we ought to do, how we ought to behave, depends on how the world IS. "

As an ethics professor, you are doubtless aware that things are a good deal more complicated than this statement allows. The IS/OUGHT split is perennial problem in ethical and legal discourse dating back centuries. One of the things that makes ethics such a tricky and fascinating problematic arises from the simultaneous need to tether notions of the good to conditions on the ground without finally allowing those conditions to determine, fully or exhaustively what counts as the good.

I make this point because I believe the two sides of this dispute, honor the con tracts or stiff the bums, take their warrants from the IS and ought sides of the schism respectively.
How about congress passing a law that says that any bonuses handed out at companies receiving bailout money last year or this year will be taxed at 100 percent?
How did AIG fail? Because they sold a form of insurance called CDS. A CDS is a contract by AIG to pay the insured a sum of money in case their mortgage is defaulted on. Now it turns out AIG is unable to honor THAT contract because they never had that much money in the bank. It turns out that CDS contract is junk. So why should the bonus contract suddenly be honored like the 10 commandments? If AIG has any money left at all, shouldn't they first fulfill their contractual obligation to the CDS holders before they even begin to think about their contractual obligation to their internal CDS sellers? How can you justify AIG defaulting on the insured, while lavishing bonuses on the insruance sellers?
Where can we read the contract?

Haven't fiduciary responsibilities been breeched?

What of unjust enrichment?

You write of bad choices, "setting that system up at A.I.G." As though we dare not challenge the 'ethics' of contract fullfillment. I sense an intimidation by the bully billionaires (why bother with precedent) --- the sanctity of contracts must prevail ... oh really?

At what point did human error lapse into crimminal conspriacy?

Is the passion of the moment always wrong? Sometimes fraudulent intent can be established. Just follow the bread crumbs. Why not impose a Receivership? Countless questions must be asked.

I do appreciate your arguments; I don't trust that they are ironclad, however. Often a good battle takes the romance out of piracy, no? To simply allow Big Banks Big Insurance and Big Oil to keep spinning the planet is, well, unacceptable..
I understand AIG is contractually obligated to dispense the bonuses, however, we’ve sort of just suffered an economic 9/11, and AIG is one of the central, “too large to fail” players that got us into this mess. Just as “special measures” concerning security were taken following 9/11, I think circumstances are such that some similar measures should be taken here – translation – no f 'ing bonuses for anyone linked with these companies until, a.) we’ve determined that nothing illegal occurred, and b.) they are no longer dependent on tax dollars to keep the company afloat, and c.) they make good on the multi-billion dollar welfare check on loan from us.
Chris,

My mirror broke a while back. I simply empathize cos I come from a place where I dug myself out of a hole much much worse than most will ever know (and I would not want anyone to be there). Thus I know that what while some people discuss ....others have to act. Those actions may not be the actions that the discuss-ers would consider "moral" or "ethical" or "correct". But in the darkness of the hole everything "seems" right because the instinct of survival is so strong. I have survived from a world that cannot even understand "contracts" much less keep them.
Great post. Infinitely better than Greenwald's Big Board piece. If I could, I'd give you a separate rating for your handling of the usual suspects who bring everything bad that happens in the world to the doorstep of Bush. In this regard, according to The New York Times, Gaithner was the point man on both bailouts, not just the second. If a first-year associate at a major law firm had handled the AIG investment the way Gaithner did, that associate would be pounding the pavement looking for a job at Legal Aid. It's one thing to be a tax cheat, but we might have hoped for a competent tax cheat.
Ok, my response to this blog is available as a blog post,
The Ethical Bankruptcy of AIG Bonuses. Thanks for the inspiration, Chris!
Maybe since "we" own 80% of the company, "we" should be privy to the names of the bonus recipients and the amount each individual is supposed to receive. Isn't an employer entitled to that? Perhaps their individual performance could then be evaluated by the employer and the question of their continued employment could be resolved on an individual basis. On the other hand, if the depths of their individual depravity in accepting huge bonuses from taxpayers' pockets were known, perhaps they would do the honorable thing and DECLINE the bonuses. It all comes back to: just because you CAN do something (accept the bonus) doesn't mean you SHOULD.
libertarius
March 16, 2009 05:02 PM

Barney Frank and his ilk should SHUT UP!! Their whining and gnashing is nothing more than a diversion to keep the people from realizing that our politicians are up to their collective asses in causing this mess.
I didn't get a chance to revisit your blog post until today. Wow, what a response and you fielded well. Your blog generated a lot of thought, debate, and energy - and you inspired others to write. You must be one heck of a prof and memorable to your students...I still hold my position but I enjoy and respect reasoned differences of opinion, especially those that inspire and provoke thought and action.
Cindy Ross

"He points out that the so-called "sacred" contract can clearly be rewritten, and has been done so for union employees many times; his example is the recent UAW renegotiation of an already-standing contract with GM. "

You are talking about apples and oranges here. The UAW contract is was renegotiated for FUTURE wages. The AIG bonuses was paid for PAST wages.

Sandra Stephens

"I'm a little confused here. Is AIG openly admitting that its bonus structure is not linked to performance of the individual or the performance of the company? "

The question was what was the required performance? Was it for just writing contracts, or the profit of those contracts?

My last bonus driven position had a minimum bonus amount to be paid each year for the operation of the business. Doing certain things increased the bonus, but if the place burned down or closed there was still a floor.
Wow – what a hot topic: The focus on contractual obligations, the often-overlooked facts that the bonuses constitute a tiny fraction of the bailout and that AIG itself has cash, the question of who is called upon to be ethical in this situation. What interests me as someone who is interested in how we communicate is the populist outrage. I’m no fan of Wall Street excesses but the amount of energy expended in righteous indignation is getting to be just as excessive. Nothing sells like populism, which is why everyone from politicians to failing newspaper editors to cable bloviators is whipping up a storm over greedy speculators and evil hedge fund managers.

Getting business to perform ethically while at the same time allowing them to make a profit and pay their shareholders is long overdue and we’ve absolutely let oversight slide over the last twenty-five years. I’ve never been certain that ethical behavior can be regulated (though I’m cautiously willing to try) but big-picture thinking ought to at the very least be demanded by thoughtful shareholders.

But right now, we’re in the middle of a crisis and something needs to be done. While yelling and pointing fingers may feel cathartic, I can’t see what good all the screaming does except to divert attention from the problem and force our leaders into politically expedient, defensive postures. Maybe the media is giving us what we want – well, we know they are – by serving up an obvious, ready-made target – Wall Street evil, American people good – is a little disingenuous and at times almost, well, unethical.
Haven't the time this morning to read all the responses....but I'm wondering what IS a bonus? If it's something contractually promised, that's not a bonus in my vocabulary, that's salary. A bonus is something extra, for personal performance or because the company made extra money.
Business ethics? Since 1980 at the Earth summit in Rio, the multinationals and our own businesses have steadfastly refused to sign on to any ethics they have not generated, so they could continue their "reckless greedy" course. The times they are achangin'.
Now that we "own" the company, we should be able to control how they spend our money.
The recipients are apparently the ones responsible for the bad gambles made that brought their company and our country down. I'd be willing to let them have the bonuses if they also get a pink slip with it.
I wholeheartedly disagree with the premise of this article. The idea that AIG is obligated to conduct business as usual is total bullshit.

There are some in Congress proposing a 100% tax on the bonuses. I'm proposing storming AIG and tarring and feathering their executive loser class.
Blackfon,

Whatever Barney Frank's culpability, and I agree there's more than enough, his reminder that AIG bonus contracts don't prevent dismissals is helpful in allowing us to balance legal and ethical mandates in this case.
On the other hand, there's nothing "wrong" with not paying money to people to whom you owe it. They have recourse to the courts for damages--not performance--and in some cases can obtain multiplied damages if your failure to pay is determined to have been unfair and deceptive under a state "little FTC" or comparable law. You may suffer reputational damage, but as between the parties and society as a whole, a breach of a contract may be a more efficient allocation of resources than performance. If you do this to three or more people at once, they can force you involuntarily into a forum (bankruptcy) where all similarly-situated creditors are treated equally. (Many of AIGs operating entities were insurance companies not eligible to file for bankruptcy, however; 11 U.S.C. 109.) But not paying, forcing people to sue you, and defending on the merits and asserting counterclaims is certainly fair play. The bonuses owed to AIG execs aren't exactly hourly wage claims.

Part of the problem here is that a bunch of career government types made an investment with money that wasn't their own, but didn't know enough to require the protections that an investor usually imposes as a condition of giving up its money in a high-risk stock or debt transaction; a seat on the board or observation rights, a role in selection of management, review of all contracts before any significant payments are made, etc.

Geithner and his team are taking the naive view that all contracts must be performed. The opposite is true; usually only land contracts or those covering a particular item of property (like a painting) are subject to "specific performance". The overwhelmingly majority of contracts may be breached, with the non-breaching party entitled to nothing more than a suit for damages. This doctrine is so well-established it is a standard exception in legal opinions.

You'd think Obama would know this, having been a law school professor (albeit, one who spent more time writing his memoirs than legal scholarship) and could have avoided the current public relations debacle.
All is not as it seems.

Read this:

"Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

AIG disclosed its retention-payment program more than a year ago, and the amount of the bonuses -- more than $400 million for Financial Products alone -- had been widely reported. But as the payments were coming due in recent days, the White House began to express its indignation.

------------------

The payment plan had been no secret.

Beginning in the first quarter of 2008, AIG disclosed the plan to offer retention awards at Financial Products. The unit had already begun to hemorrhage money, a problem that would later grow exponentially. The unit's executives, fearing they might lose valuable employees in the tumultuous months to come, successfully negotiated more than $400 million for their workers, to be paid this month and again next year.

At the Federal Reserve Bank of New York, which has directly overseen AIG since its federal takeover in September, officials have studied the possibility of rescinding or delaying the bonuses. They even brought in outside lawyers for advice. The conclusion: If the bonuses weren't paid, the AIG staffers would be able to sue the company and probably would win, not just what they were owed but also punitive damages that would make the ultimate cost perhaps two to three times as high as the bonuses themselves."

http://www.washingtonpost.com/wp-dyn/content/article/20 ...
I hope you feel better now having agreed in part with Rush Limbaugh and.....me!....But, there is one point I wish to make...I did do something. I canceled my insurance policies with them and have taken my business elsewhere. They won't be getting any more of my money except through the coffers in Washington DC.
The government knew over a year ago what the bonus structure would be and yet it STILL gave them the bailout money with no restrictions. In fact, Chris Dodd even put in an amendment in the stimulus bill that EXEMPTED from the rate of taxation contractual bonuses.

Your piece rightly points out that it's a matter of law.

My question is why are they making such a big stink out of it NOW? Obama looking for the next target of distraction. Auto execs, Limbaugh, now AIG.

This administration is full of punks.
Thanks for the comments, folks. I don't have time to reply to them all.

I'll only point out:
"Ownership" of a company does not imply (direct) control. That's not how corporate governance works, for good reasons.

As one or two of you pointed out, the bonuses in question are *retention* bonuses, not performance bonuses. That matters.

See today's blog entry for a different angle.

Cheers,
Chris.
Your point is well made, but surely you appreciate the irony that the mortgages that were turned into the derivatives (by what process I don't pretend to understand) that these high-rollers used to bring down AIG were also contracts that are now--as they probably knew they would be--broken, while their "contracted" bonuses are being honored.
I would like to read the contracts and see what the criteria are for award of bonuses in this case. In my experience, bonuses are a reward for individual performance that is above average or group (company) performance that is above average. In the case of AIG, I see little of either, but before I pass judgement, I would like to read the bonus award provisions of the contracts involved. I am interested in the situation where a person is awarded a bonus after performing a "lousy job" as you put it. Although I do not specialize in business ethics, my wife does, and she taught Business Ethics for more than 20 years.
One thread that runs consistently through this entire AIG mess is the incompetence of the politicians involved. They either fail to exercise legitimate power when they have the clear opportunity so to do (conditioning the investment of funds upon adjustments in executive compensation) or when faced with the unfortunate consequences of their own negligence, seek to exercise powers that are clearly questionable from a constitutional standpoint (bill of attainder-type taxes, outright confiscation, ignoring the corporate veil, etc.)

If the press stays on the job, I predict that Geithner and Dodd (both of whom have had, interestingly enough, serious ethical issues relating to unrelated matters) will be forced to leave office. It can't happen soon enough. Of course, if that happens, Obama's wonderful administrative expertise will result in no leadership at all in the Treasury Department.
I can't vouch for this document (another commentator sent it to me), but the source says it's the AIG retention policy:

http://www.foxbusiness.com/story/markets/read-aig-financial-products-employee-retention-plan/
Okay. I get the "retention bonus" thing. But can anyone tell me why an employer would want to "retain" an incompetent employee, and pay a hefty "bonus" for the privilege?? Throw the bums out, and keep the retention bonuses.
SuiJuris94

Please see today's blog entry:
http://open.salon.com/blog/chris_macdonald/2009/03/16/what_should_aigs_liddy_do
"There are some in Congress proposing a 100% tax on the bonuses. "

You don't see a problem in passing tax laws that are aimed at only a few people? How about using the tax law to punish people you don't agree with? How about retroactive tax laws?

There are more problems with this than you can shake a stick at, and I would assume that may not be legal.
Catnlion:

Agreed. I'm not a lawyer, but a punitive tax on specific individuals sounds an awful lot like a violation of "due process" requirements of the U.S. Constitution.

Chris.
The Congressional leaders who are floating this confiscatory tax proposal are not noted for their knowledge of the Constitution. They regard their power as absolute, and, as the saying goes, absolute power corrupts absolutely.

But the AIG bonus recipients are not really concerned. They know that they can always take advantage of the Gaithner/Daschle/et al. Tax Exemption.
Just heard Obama's "defense" of Tim Geithner: he didn't WRITE the AIG bonus contracts. Apparently when you're in charge of giving away billions of taxpayer dollars to a private company, you're only charged with knowledge of company commitments that you have authored. Just how stupid does Obama think the public is?

Other Obama "defenses" include the observation that TG works hard and, guess what?, inherited a big mess. It appears that Obama is having as much difficulty defending TG as OS liberals are having defending Obama.

I wonder if TG's sale of his New York digs is rescindable. If not he can always say, as some Dems in Congress are, in effect, saying, "What's a contract? Just a piece of paper."
Such a tax provision would be unconstitutional if it were crafted so as to apply only to specific individuals. But a law that read "All executive or other employee bonuses distributed by companies that have accepted taxpayer bailouts will be subject to a 100% surtax" would indeed pass constitutional muster.
What a completely ridiculous post. I guess it's better than a semi-porn photoblog or a dopey interview, but still.

The sad fact is that in addition to this point of hypocrisy...
"Larry Summers says the government simply can't break the contracts that AIG had with executives, but nobody said that when Congress demanded that auto makers break union contracts and cut hourly wages for factory workers as a condition of receiving TARP funds." ...we have teachers giving up part of their salary so that layoff wont occur--contrast that with AIG. What a sense of entitlement some have!

I just want to know which senator/rep "behind closed doors" is responsible for stripping out the legistlation that would have made these bonuses impossible in the first place. That person(s) has earned one hell of a "bonus."
ghost writer:

Ridiculous? Please say why. I've presented a reasoned argument; actually, two of them in two consecutive blog posts.

The fact that you disagree doesn't make me wrong.

Chris.
Sorry, I should have connected the dots better.
If autoworkers must sacrifice to save their jobs, and if teachers must sacrifice to save jobs, then "retention bonuses" must be sacrificed--it's only fair.

If you can't understand that then your in the tank.
ghost writer:

Apples and oranges. In the present case, we're talking about paying money to retain employees. It's like paying your rent to retain a roof over your head, only different.

Anyway, that issue -- parity with auto workers -- was discussed in comments above.

Chris.
You're definitely in the tank, friend.
Ghost writer:

Well, thanks for taking the time to explain my errors.

Chris.
The problem with your argument, it seems to me, is that it vacillates between ethical warrants--we should pay these people because having entered into a contract it is the right thing to do--and a legal argument--we must pay these people because it is wrong to default upon a legal obligation. Neither warrant stands on its own. If the AIG executives havee screwed up royally, bringing the company and the larger economy to the brink of ruin, then it is not ethical of them to accept bonuses, either for performance (they didn't) or retention (they deserve to be fired). If it is unethical for them to receive the bonuses, it cannot, logically, be unethical for us to withold them. If on tthe other hand, this is a legal question, i.e. we must obey the law, then we the people are well withi n our rights to test our legal obligation in the courts until the cows come home, sicken and die. Legal obhligation don't exist until every option of adjudication has been exhausted. Your claim, that we should just capitulate and pay seems to me to depend upon a combining the two registers in a way that does justice to the integrity of neither. It is not then an u n sophisticated, let alon stupid argument; rather it is a sophistical one.
What factors does business ethics take into account? I'm awestruck by the limited number of factors one needs to take into account before one can render a definitive opinion.

Do you accept that it is ever ethical to break a contract? Faced with doing ethical harm to two people, what are some examples of reasons you think are ok? Is it ever acceptable for a business to violate the law in order to achieve a higher purpose, or is this just not one of those cases?

There is something about the basic premise here that makes the phrase “business ethics” take on an almost oxymoronic nature if the answer to whether it's ethical to break a contract hinges on the definition of a contract. That doesn't sound like ethics to me, it sounds like a statement of what the law is. But even a basic course in contracts talks about breach, remedies, etc. So what is the meta-theory that tells me when it's ok to do that and who are the parties to the meta-domain that must be considered in order for me to know that I've worked out all stakeholders in the ethical (not legal) situation in question. Is the general public a stakeholder? How is its interest weighed in the decision?
To clarify, I meant two parties, not two people. And specifically, faced with wrong to stockholders vs wrong to the public. Just as an example.
Libertarius:

"If it is unethical for them to receive the bonuses, it cannot, logically, be unethical for us to withold them."

I think that's false, at least as a logical claim.

Compare: If a poor man owes a rich man money, it might be unethical for the rich man to demand it back, though it would be unethical for the poor man to refuse to pay his debt. (I can imagine exceptions & complications, but I think this kind of example shows that the logical implication you drew is faulty, at least as a universal claim.)

Chris.
Kent:

"What factors does business ethics take into account?"

Well, all of them, hopefully. But business ethics is a field, not a religion. Different people will tackle the same question from different angles. There are Marxist business ethicist and libertarian ones, for example, and you can imagine how different the range of factors they take into consideration would be. I don't cleave to a particular point of view like that.

Sure, I can imagine cases where it's OK to break a contract, just as there are cases when it's OK to break other kinds of promises.

But if a major institution is going to do so, in a punitive manner, it ought to do so after some kind of due process.

Today's blog posting (not on OS yet) is at http://www.businessethicsblog.com and lays out my 2 arguments (one rooted in consequences, the other in duty) and the conditions I think need to be satisfied to change my mind on this. I'm not necessarily enjoying being a loner on this issue.

Chris.
Suppose AIG had made a deal with me personally, a single individual, to provide me with some service that used to make sense and be economical but no longer is. Say I'm paying $1000 for the service but it now costs $30,000 to provide it. The damage to the company would be $100,000 to default. But now the company is bleeding $10Million per day and to perform the service now, would cost the service $9.9Million in lost opportunity because it would mean a day the person who does it is not at work fixing the other problem. You're saying it would take due process to break the contract; the company would not just break the contract and say "sue us".
Kent:

I suppose it would depend on whether you had already done the work or not. Simply refusing to pay after the fact would be very bad. And if they broke the contract before services were rendered: much less bad, clearly, but then it might simply be stupid (if they either still needed your services, or valued their reputation for keeping promises to contractors.)

Chris.
Ruining of reputation doesn't seem like an ethical issue. I don't think of ethics as really implicating self-interest, in fact, I think self-interest hides ethical considerations. A decision not to ruin their reputation seems merely like a business judgment to me. An ethical judgment, to me, in that situation would be one that determines who is potentially harmed and that does the least harm.
Chris,

Most universal claims are flawed, so I won't insist that mine is fool-proof. But I think your counter-example is unconvincing. There is nothing unethical about a rich man collecting on a debt legitimately incurred by a poor man. The rich man may not be a saint in this instance, but he's no sinner.

The situation under discussion here involves instead an unethical or illegitimate arrangement: the agreement to pay performance bonuses for non-performance or retention bonuses for those undeserving of retention. It cannot as a matter of logic be unethical to refuse to subscribe to a system of rules that are themselves unethical. It may (or may not) be illegal, but the gap between the two is the space of civil disobedience. When Thoreau refused to pay the tax, he was in effect breaking a civil contract whose implications were, from his perspective, unethical, much like these bonuses. His position would be to break the contract on behalf of the substantive good, rather than to keep the contract in accordance with the formal good (your position). I prefer to side with Thoreau.
Libertarius:

I don't know what unethical system of rules you're talking about. I think what is under consideration, here, is a mostly-good system of rules that sometimes produces bad consequences.

Anyway, we have to be very careful to specify conditions for ethical law-breaking. Typically, justified civil disobedience involves a) breaking the law publicly, and b) accepting punishment for it, in order to c) stimulate change. That might not be the only justification; but we certainly don't want to be telling major corporations, "Hey, break the law when you think it's ethically justified."

Chris.
Well, maybe I will have to change my opinion.

If you think we have a mostly good system that uses massive bonuses as retention tools for utterly failed executives--and remember AIG was already failing when these bonuses were contracted--then I would say you are overly identified with the masters of the business community, or as one comment had it "in the tank" If on the other hand your position is merely that contracts generally are a mostly good system and so we must honor the law governing them--if you have quietly shifted back from the ethical to the legal register--then my legal argument still holds. As these were retention bonuses, simply fire the would-be recipients and

a) let them sue for their money-- the courts rather than philosophy professors being the agency that decides legal obligation; or

b) pass a law stating that all executive and employee bonuses that are distributed now or in future, by any private concern dependent upon federal government bail out for their continued operation will be subject to a 100% federal surtax to be withheld at the time of payment. Thus framed, the tax would apply not to particular individuals qua individuals but to a particular circumstance of income and as such would be fully constitutional.
Libertarius:

Please! That's clearly not the system I was talking about.

*You* were talking about a system of laws. I replied. I'm talking about *that.*

And for the record: I never claimed to decide what's legal or not.

Chris.
Fair enough. But the system of laws you call "mostly good" has been exploited by failed executives to enrich themselves with funds appropriated from their fellow citizens. If that behavior is unethical, then it would be likewise unethical to leave unexplored avenues that might prevent them from doing so. Condoning the moral equivalent of thievery is itself the moral equivalent of complicity. If on the other hand those executives are within their ethical rights to exploit the system to enrich themselves at their neighbors expense, their neighbors are likewise within their ethical rights to exploit the same "mostly good" system to frustrate their efforts--be it by interminable court proceedings or by draconian but constitutionally permissible taxation.

By contrast, your argument presumes an uneven playing field in which the executives are to be judged by the (relatively porous) letter of the law, while their victims are compelled to play according to a (relatively airtight) ethical spirit. It is an argument that accommodates and even encapsulates the rigged nature of the corporate system.