Thursday, March 19, 2009

Bonuses, Contracts and Life. Oh My!

The current 'scandal' surrounding the multi-million dollar 'Retention Bonuses' paid to executives of the recently bailed-out insurance 'giant' AIG has drawn my attention not so much because it is the number one topic in the news for the past two days, but because it raises some interesting questions about ethics, obligations and the role of a contract in a relationship.

First of all, I think that the issue suffers from some tangible difficulties with semantics. The very name of these payments seems designed to inflame and anger everyone except those who actually received them. By calling them "bonuses" rather than simply "payments" implies that they were extra, over and beyond the actual compensation that these individuals received. Thus, when we discover that the compensation may not have been "deserved" because of the failure of the individuals to live up to their fiduciary "end of the bargain" hearing those payments described as "bonuses" only serves to infuriate us. After all, aren't bonuses supposed to be an incentive for good performance? Even if they had been called the more neutral and potentially accurate term, "payments" the fundamental issue of competence--or the lack of it--is still inescapable. Whom are we rewarding, and for what? hat if there had been penalties for poor performance instead? I'm thinking of a good flogging, but that's not the point of this essay.

The other word that gets in the way, though less so in the media because it is deliberately obfuscatory and therefore hard to understand is "retention". This is as in "to retain" the 'valuable' services of the individuals who are making the bonuses. This is presumably because in spite of these guys' talent, the company is still failing! In order to keep the rats from jumping ship before it crashes onto the rocks, other individuals--who are ironically receiving the very same retention incentives themselves--have asked the hard working but unlucky losers to stay on and 'almost' go down with the ship.

I have to say 'almost' because in fact many of these highly talented and therefore sought after executives actually bailed after being bailed out. That is, many simply left in spite of being paid hundreds of thousands--in some cases, millions-of dollars to stay. So much for incentives.

Aside from the semantic difficulties posed by the AIG 'bonuses', there are some real-world issues that are raised by this backward state of affairs, not the least of which has to do with the very nature of contracts, why we write them, sign them and how we break them.

Quite simply, contracts are written to be broken.

In this brief essay I will not have time to comment on the law surrounding contracts, but in fact it isn't time or space that constrains me on the topic but ignorance. I really know nothing of contract law, and have to cede to 'authorities' who say that contracts form the basis of our civilized society. What I will not concede to these same authorities is the notion that failing to live up to a contract--any contract--amounts to the disintegration of the laws underpinning society itself. The claim made all too frequently is that abandoning even a single contract sets a 'dangerous precedent' that will undermine all other contracts, past present and future.

This is just too dramatic a claim to be supported. Even if breaking a contract does seem, on the surface, to be at the very least unfair to one or more party in the contract, in fact, this is the very condition anticipated by the document and is one of the principal reason it would have been drawn up in the first place.

A principle element to the concept of a contractual obligation is the underlying assumption that one or more clauses in it will not in fact be honored. The expectation is that the contract will be broken. It isn't a case of if the contract will be broken; it's just a matter of when and how. It is why we draw them up and why we spend so much time in court resolving them. It's why there is whole section of the law devoted to it.

Consider another contractual obligation which is supposed to be sacred, so important that we not only sign a document, but enter into an oath with God and those around us to honor that contract. I am talking about marriage. Of course, more than half of all marriages end in divorce, so where is the sanctity of the marriage contract? It isn't on the paper or in the words, for the paper can be destroyed and the words, well, that's just a semantic challenge, avoided with such terms as "irreconcilable differences" or "unnecessary hardship." In other words, despite it's sanctity and it's importance to the moral structure of society, the marriage contract is not inviolate. It can be, often is, broken.

So too can the financial obligations 'we' taxpayers have to the shady and incompetent money managers at AIG (and the others like them) be broken. So sad, too bad. The walls of society will not come crumbling down as a result. The failure of say, General Motors (and there are other companies like this) to pay their rank-and-file workers the pensions and insurance that was in those workers'labor contract while they worked is a far greater failure--ethically and in human terms--of our legal and financial systems. In the end, the failure of these large companies to honor the obligations to pay their employees fairly is far more likely to engender the breakdown of societal fabric so publicly feared these days.

After all, it is the protectors of these outrageously undeserved payments to the white collar criminals who got us all into this mess in the first place. No wonder they are claiming that the sky is falling.

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