Comments on: New York Times Financial Columnist Shows Dreadful Lack of Common Sense http://www.ragingblog.com/2009/03/new-york-times-financial-columnist-shows-dreadful-lack-of-common-sense/ Charles Carreon Sun, 04 Jul 2010 04:56:05 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Neal J. King http://www.ragingblog.com/2009/03/new-york-times-financial-columnist-shows-dreadful-lack-of-common-sense/comment-page-1/#comment-9 Neal J. King Thu, 19 Mar 2009 20:42:36 +0000 http://www.ragingblog.com/?p=352#comment-9 The best arguments I've seen in favor of the payments to the AIG folks have been provided by Nate Silver (of <b>www.fivethirtyeight.com</b>), based on his study of AIG's 2007 10-K filing. The basic point was that the compensation for these folks had been primarily based on profits (historically), and they were already looking at a losing year. In order to hold people in their jobs, as opposed to leaving in 2007, they had to guarantee their compensation <b>independent</b> of results. So from that point of view, the agreed payments were not a bonus (no one was expecting favorable results at that point, so nobody could expect a bonus) but rather a quick & dirty way of converting from an incentivized contingency-based scheme to a salary-based system - albeit one with a large lump-sum payment. From that point of view, if that was promised to them as a form of salary, without which they would have left in 2007, there is some justification for honoring the agreement. Of course, a counter-balancing good point is that the amount of compensation that was expected by professionals in those fields (and I have <b>heard</b> that these were quants (analysts and modelers, not executives) is pretty darn high, amounting to about 1/3 of profits in the good years. This seems to be a ridiculously generous approach to compensation, highly skewed towards incentivizing risk. So if Silver's analysis is correct (and if I have interpreted correctly), the real problem was not with the agreement for the results-independent "bonus" in the last couple of years, but with the general compensation scheme. The best arguments I’ve seen in favor of the payments to the AIG folks have been provided by Nate Silver (of http://www.fivethirtyeight.com), based on his study of AIG’s 2007 10-K filing. The basic point was that the compensation for these folks had been primarily based on profits (historically), and they were already looking at a losing year. In order to hold people in their jobs, as opposed to leaving in 2007, they had to guarantee their compensation independent of results. So from that point of view, the agreed payments were not a bonus (no one was expecting favorable results at that point, so nobody could expect a bonus) but rather a quick & dirty way of converting from an incentivized contingency-based scheme to a salary-based system – albeit one with a large lump-sum payment.

From that point of view, if that was promised to them as a form of salary, without which they would have left in 2007, there is some justification for honoring the agreement. Of course, a counter-balancing good point is that the amount of compensation that was expected by professionals in those fields (and I have heard that these were quants (analysts and modelers, not executives) is pretty darn high, amounting to about 1/3 of profits in the good years. This seems to be a ridiculously generous approach to compensation, highly skewed towards incentivizing risk.

So if Silver’s analysis is correct (and if I have interpreted correctly), the real problem was not with the agreement for the results-independent “bonus” in the last couple of years, but with the general compensation scheme.

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