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02 October 2023

AIG could pay hefty bonus once again despite outrage

So far, the government has yet to enact concrete steps to prevent it from happening all over again. (AP)

By Reuters

To many Americans, it is a matter of common sense: traders who failed so spectacularly at their jobs that they nearly brought down the global economy should be fired, not rewarded with handsome bonuses.

Yet AIG, the fallen insurer, paid out an additional $100 million (Dh367m) this month, much of it to the very financial products division whose rampant risk-taking took the company to the brink. And there is another $75m coming.

So far, the government has yet to enact concrete steps to prevent it from happening all over again.

Regulators still lack the authority to wind down large financial firms, and the private sector continues to use compensation contracts that preclude renegotiation when performance sours.

Treasury Secretary Timothy Geithner has called on Congress to pass a tax on financial institutions, which he says could be used to help recoup the money.

But experts say this approach ignores a key lesson from the crisis: the need to ensure that contracts for executive pay are written in such a way that encourages prudent behaviour and accountability, not unabashed risk-taking.

"All pay plans should require checks and balances, including the use of 'circuit breakers' which prohibit any payments when the company is in a financial crisis or similar problem situation - i e AIG and most of Wall Street," said Paul Dorf, a Managing Director at consulting firm Compensation Resources.

Many analysts say such restrictions, sometimes known as clawbacks, should extend well beyond finance, pointing to scandals at firms such as Enron and Worldcom.

Geithner, and pay czar Kenneth Feinberg, say that while lamentable, the AIG payments must legally be honoured. President Barack Obama has argued that high executive pay is a natural outcome of the "free market". This explanation does not sit well with many Americans, who are upset at what they see as an unfair system that rewards incompetence.

And then there is the staggering price tag: the AIG bailout, which gave the government a 79.9 per cent stake in the firm, cost some $182 billion – enough to employ more than 12 million minimum wage workers for a full year.

While executive pay tends to be far higher in the United States than in other rich nations, European governments have taken a tougher stance. Britain has announced a 50 per cent levy on large bank bonuses and France appears to be moving in a similar direction.

In AIG's case, remuneration contracts were written in a way that largely blocks any sort of legal dispute after the fact.


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