Bonuses for the well-off, courtesy of us
Posted by Jim Reilly on Saturday, January 10, 2009
On CNBC (the cable business news channel) a few weeks ago, the CEO of American International Group made his case for using taxpayer bailout money to pay bonuses to AIG's executives. The situation is this: AIG, one of the world's largest insurance and financial services companies, got about $150 billion of the money that the federal government made available to help unfreeze credit markets. AIG plans to pay back some of that money by selling some of its operations. The CEO, Edward Liddy, argued on December 22 that, without "retention bonuses," executives in the spun-off operations will fly the coop, thereby reducing the value of those assets and lessening the amount that taxpayers will get back.
To his credit, Mr. Liddy has announced that he will take compensation of $1 for 2008 and 2009. Opinions differ about whether his strategy will be successful in keeping the most talented executives on board at AIG.
In forming our own opinions, let's consider a deeper issue. Is it in our society's interest to have the most talented people in the financial sector at all? It was described to me that the financial sector creates value by doing two things: allocating capital and managing risk. Those things are important - but are they really THAT important? More important than actually manufacturing stuff? So important that the people who excel in them should be some of the wealthiest people on earth? While they do provide a service, is that service really worth the eighteen or twenty percent return on investment that they tend to make?
Look at the skyline of an American city in this first decade of the new century. Most of the tall buildings have the names of banks on them, with some insurance companies thrown in for variety. These endeavors throw off enough cash to build skyscrapers, while companies that actually make things are hardly represented. So, when the best and brightest choose their careers, they find that the world of finance offers the shortest route to wealth. People who, had they been born a century earlier, might have made their fortunes as inventors and factory owners, have instead devoted themselves to crafting, and trading in, increasingly complex financial instruments. Is that really a good use of human resources?
Under normal circumstances, you could argue that these questions are moot. People may choose to work wherever they want, and there's nothing wrong with the profit motive. But these aren't normal circumstances. We (the taxpayers) are being asked to play a role in providing incentive for people at the highest levels of achievement. So let's point the incentive in a better direction!
To his credit, Mr. Liddy has announced that he will take compensation of $1 for 2008 and 2009. Opinions differ about whether his strategy will be successful in keeping the most talented executives on board at AIG.
In forming our own opinions, let's consider a deeper issue. Is it in our society's interest to have the most talented people in the financial sector at all? It was described to me that the financial sector creates value by doing two things: allocating capital and managing risk. Those things are important - but are they really THAT important? More important than actually manufacturing stuff? So important that the people who excel in them should be some of the wealthiest people on earth? While they do provide a service, is that service really worth the eighteen or twenty percent return on investment that they tend to make?
Look at the skyline of an American city in this first decade of the new century. Most of the tall buildings have the names of banks on them, with some insurance companies thrown in for variety. These endeavors throw off enough cash to build skyscrapers, while companies that actually make things are hardly represented. So, when the best and brightest choose their careers, they find that the world of finance offers the shortest route to wealth. People who, had they been born a century earlier, might have made their fortunes as inventors and factory owners, have instead devoted themselves to crafting, and trading in, increasingly complex financial instruments. Is that really a good use of human resources?
Under normal circumstances, you could argue that these questions are moot. People may choose to work wherever they want, and there's nothing wrong with the profit motive. But these aren't normal circumstances. We (the taxpayers) are being asked to play a role in providing incentive for people at the highest levels of achievement. So let's point the incentive in a better direction!
Tags: "aig bailout" "taxpayer financed bonuses"
