How much do people matter?
Insurance giant AIG to pay $165 million in bonuses
http://news.yahoo.com/s/ap/20090315/ap_on_bi_ge/aig_bonuses
We will discuss this a bit later, but I couldn’t help but post this. Do you buy the tournament model (we have to pay more than the rest to get the smartest people, and that by so doing we will be managed best)? Doug Smidl mentioned that it was definitely worth it to pay really “good people” 30% more. That seems to make sense at some level. But does it make sense here? Consider the following quote.
“We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” Liddy said.
Now check out the performance of AIG in the last year:
This is a typical strawman. I do not know if you are the best talent out there, would you like to work for AIG, given the publicity it has? I saw this same comment repeated often when I was researching the options backdating paper, we need to pay more to compensate and retain the best talent and since we do not have liquidity we will backdate. Reminds me of the Kenneth Lay chair in economics. No amount of endowed funds could fill that chair…
I completely agree with the idea of paying more to get the best, but how on earth do they justify the idea that they have the best? As far as I can tell, the “top talent” that AIG is paying to retain has failed miserably.
The idea of a bonus is to reward someone for a job well done and to share the company’s success with its employees. It is incentive to do well when it is used in this way. When you continue to hand out rewards after a failure, you have disconnected the cause and effect and the feedback mechanism is now broken. Instead of searching for new ideas and better ways to manage, these people are receiving the message that everything is alright, proceed as usual. Everything is not alright.