This past week, outrage was sparked over the controversial executive compensation from AIG, which recently received billions in taxpayer dollars. President Barack Obama on Monday blasted AIG and pledged to try and prevent it from giving its executives 165 million dollars in bonuses.
Eight top executives of Nortel Networks got approval from the courts for up to $7.3-million (U.S.) in bonus payments under a retention plan – despite the layoffs of 1,100 Canadian workers last year who were denied their severances after the telecommunications giant filed for bankruptcy protection in January.
The list of outrageous compensation to executives of failing companies stretches for miles and will continue to stretch because they argue that these big bonuses are required in order to keep good people in the company.
I say that’s bull. But it won’t change. It will just get worse.
And here’s why.
When you offer big bonuses to high level executives, you’re giving them an incentive to start looking for the BBD – the Bigger, Better Deal. How many executives of failing corporations have watched their companies go further down the drain during their tenure?
Why would anyone want to keep the guys who have done nothing except help the corporations fail by requiring billions in taxpayer dollars to survive and millions in compensation to file for bankruptcy protection?
And once their contracts are over, then what?
Like sports, they become free agents and begin to look for the BBD.
Great employees are like great athletes. Sure they want the money, but they also want to play for a team where they can show off their talents so that they can work toward the next BBD. Do you think any of AIG’s or Nortel’s top producers will stay at their jobs? Fat chance.
Can you picture what these guys will face if they stayed at their jobs? Just imagine the opening line of an employee from AIG, “Hi, I am from AIG and I want to show you how to protect your money.” Yeah, that will help close a deal. It’s like saying, “Hi, I am Vince Carter and I’ll win games for your team.” Sorry Vince.
Compare AIG to the NBA’s Grizzlies. Do you think there is person on that team, or any other team, that wants to play for them? Every player on the Grizzlies will be looking at other teams once their contracts are up. Every top-level employee of these bailout banks and insurance companies will leave as soon as they’ve received their bonuses. Once the bonus season is over, it’s the BBD for them.
That’s why these outrageous compensations will get worse.
Think about it. The stock markets are insanely depressed. Citigroup used to be worth fifty bucks. Now they’re under three. AIG was over seventy bucks. Now they’re barely breaking one. The only possible way for AIG, Citigroup and the struggling banks to retain and entice new employees is to overpay with stock options.
Every employee, especially the sales guys, know this. And every one of them will use this as leverage.
These financial groups know they can’t offer them a working environment where they can be great at their jobs and show their talents. But what they can offer is a lottery ticket with insanely great odds by overcompensating them through stock options.
Let’s put this into perspective and use AIG as an example:
I am going to give you ten million stock options (which is a very real scenario for top level executives) at today’s current prices, which is $1.26. Last year, we were near $50. Our stock will bounce back once the markets turn around and even if we get back to a quarter of what we were last year, you’ve made a bundle. Oh, and the government has our back.
Now if you were in the NBA making $10 million per year and was offered a chance at $100 million to play for the Grizzlies with the NBA backing that contract, would you? That’s how these banks will retain and attract talent.
And that’s why when our markets settle and these banks begin paying back their TARP, you’re going to see even more headlines regarding outrageous compensation. All the while taxpayers are waiting for their money.
So instead of focusing on outrageous compensation from yesterday, the Government needs to figure a system for the future because that’s when the BIG money will be revealed. The amount of wealth that will be generated for these few executives and employees via the current financial sector bail-out will be astounding. It will be tax payers who will ultimately provide the biggest compensation packages in history for these guys.
With the governments preventing these large entities from failure and putting in place the new laws and regulations for financial best practices, the survival of these corporations rests more on our government and our tax dollars, rather than the skill set of the CEO’s and high level executives.
The bailout has simply become a euphemism for making the executives of these financial entities richer than they were before.
Meanwhile, the lower level employees lose their jobs, their tax money, and their life savings.
Once again, the rich get richer and the poor get poorer.
What a concept.