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    AIG CaseStudy

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    saira_shah72
    The document summarizes the controversy over retention bonuses paid by American International Group (AIG) to employees in its Financial Products unit in early 2009. It describes how AIG instituted a contractual bonus plan in 2008 to encourage employees to remain with the company as it shut down the struggling Financial Products unit. However, when AIG received billions in government bailout money, public and political outrage ensued over the $165 million in bonuses paid, including over $1 million to 73 employees. While AIG asked recipients to return half the bonuses, some employees like top recipient Douglas Poling agreed to return bonuses, while others like Jake DeSantis resigned and kept his bonus to donate to charity.

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    AIG CaseStudy

    Uploaded by

    saira_shah72
    349 views5 pages
    The document summarizes the controversy over retention bonuses paid by American International Group (AIG) to employees in its Financial Products unit in early 2009. It describes how AIG instituted a contractual bonus plan in 2008 to encourage employees to remain with the company as it shut down the struggling Financial Products unit. However, when AIG received billions in government bailout money, public and political outrage ensued over the $165 million in bonuses paid, including over $1 million to 73 employees. While AIG asked recipients to return half the bonuses, some employees like top recipient Douglas Poling agreed to return bonuses, while others like Jake DeSantis resigned and kept his bonus to donate to charity.

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    The document summarizes the controversy over retention bonuses paid by American International Group (AIG) to employees in its Financial Products unit in early 2009. It describes how AIG instituted a contractual bonus plan in 2008 to encourage employees to remain with the company as it shut down the struggling Financial Products unit. However, when AIG received billions in government bailout money, public and political outrage ensued over the $165 million in bonuses paid, including over $1 million to 73 employees. While AIG asked recipients to return half the bonuses, some employees like top recipient Douglas Poling agreed to return bonuses, while others like Jake DeSantis resigned and kept his bonus to donate to charity.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    349 views5 pages

    AIG CaseStudy

    Uploaded by

    saira_shah72
    The document summarizes the controversy over retention bonuses paid by American International Group (AIG) to employees in its Financial Products unit in early 2009. It describes how AIG instituted a contractual bonus plan in 2008 to encourage employees to remain with the company as it shut down the struggling Financial Products unit. However, when AIG received billions in government bailout money, public and political outrage ensued over the $165 million in bonuses paid, including over $1 million to 73 employees. While AIG asked recipients to return half the bonuses, some employees like top recipient Douglas Poling agreed to return bonuses, while others like Jake DeSantis resigned and kept his bonus to donate to charity.

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    CASE STUDY: AIG

    Controversial Retention Bonuses at AIG


    American International Group (AIG), a behemoth insurance and financial services company,
    became notoriously famous in early 2009 for the payment of $165 million in retention bonuses to
    employees in its Financial Products unit. This was the same unit that was instrumental in
    bringing AIG to its knees and necessitating the infusion of billions of dollars in U.S. government
    bailout money. Although the near-collapse of AIG was significantly influenced by soured trades
    entered into by the companys Financial Products division, the operations of other AIG units,
    such as the financial gambles of its Investments unit, helped cripple the company as well.1
    Rapidly mounting financial losses had been occurring in the Financial Products unit for
    some time. Consequently, AIG decided to unwind the business and shut it down. In early 2008,
    employees in the unit were asked to remain with the company through the shutdown and,
    essentially, to work themselves out of a job. 2 To entice talented employees to stay and work, a
    contractual retention bonus plan was instituted.3 According to a report in The Washington Post,
    the Financial Products employees were repeatedly assured that AIG would honor these
    contractual obligations.4
    The bonus plan was highly favorable to AIGs Financial Products employees, as there
    was no firm connection to their job performance. The units employees were paid bonuses
    totaling $423 million in 2007, despite a paper loss of $11.5 billion on toxic real estate assets. 5The
    2008 bonus plan, which was approved in March of that year just as the units losses were
    beginning to surface,6 was designed to kick in without regard to paper losses.7 For 2008, paper
    losses on the toxic real estate assets ballooned to $28.6 billion, and total losses were more than
    $40 billion.8
    According to New York Attorney General Andrew Cuomo, who was threatening legal
    action against AIG, seventy-three Financial Products employees received $1 million or more in
    bonus payments. The top recipient, identified by The Wall Street Journal as Douglas Poling,
    received more than $6.4 million, whereas the next half-dozen top bonus recipients got more than
    $4 million each. In addition, another fifteen employees received $2 million or more, and fifty-

    1 S. Ng and L. Pleven, An AIG Units Quest to Juice Profit Securities-Lending Business Made Risky Bets; They
    Backfired on Insurer, The Wall Street Journal (Eastern edition) (February 5, 2009): C1.
    2 H. W. Jenkins, Jr., The Real AIG Disgrace, The Wall Street Journal (Eastern edition) (March 25, 2009): A11.
    3 Ibid.
    4 Ibid.
    5 R. Smith and L. Pleven, Some Will Pay Back AIG Bonuses, The Wall Street Journal (Eastern edition) (March
    19, 2009): A1.
    6 R. Smith, J. Weisman, and L. Pleven, Some at AIG Buck Efforts to Give Back Bonus Pay, The Wall Street
    Journal (Eastern edition) (March 26, 2009): C1.
    7 Smith and Pleven, Some Will Pay Back AIG Bonuses, A1.
    8 Ibid.

    one other employees received $1 million or more. 9 Of those people collecting more than $1
    million, eleven have already left the company, Mr. Cuomos office said.10
    When the retention bonuses were paid in March 2009, the U.S. Congress, President
    Obamas administration, and the public were outraged. Under intense political pressure, AIGs
    CEO Edward Liddy, who was working for only $1 a year, asked the bonus recipients to cough
    up half their pay, despite fearing that resignations would follow.11 In defense of the bonuses,
    however, Gerry Pasciucco, head of the Financial Products unit, observed that the top bonus
    recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility,
    infrastructure and energy investments. Hes done an excellent job at the task of unwinding his
    book, of realizing value.12
    In the ensuing emotionally charged days, employees of the Financial Products unit
    pondered what to do. According to one account, employees have huddled in small groups in
    conference rooms off the divisions main trading floor in Wilton, Conn., debating what to do.
    Some have expressed worries about retaliation. One employee said he had instructed his wife to
    call the police in the event his identity became known and a news truck appeared at his home.
    Others commiserated that their children have been verbally abused in school. Employees have
    passed around emails from colleagues who opposed returning the payments.13
    Some Financial Products employees decided to return their bonuses. Mr. Poling indicated
    he intended to return his bonus.14 Fifteen of the top 20 recipients of the retention bonuses have
    agreed to give back a total of more than $30 million in payments.15
    Others Financial Products employees opted to keep their bonuses, perhaps the most
    notable being Jake DeSantis, a Financial Products unit executive who received an after-tax bonus
    of $742,006.40. On March 25, 2009, in an Op-Ed contribution to the New York Times, DeSantis
    published an open letter to AIGs CEO, Edward Liddy, wherein he resigned from his AIG
    position. His letter read in part:

    After 12 months of hard work dismantling the companyduring which


    A.I.G. reassured us many times we would be rewarded in March 2009
    we in the financial products unit have been betrayed by A.I.G. and are
    being unfairly persecuted by elected officials. In response to this, I will
    now leave the company. I take this action after 11 years of dedicated,
    honorable service to A.I.G. I can no longer effectively perform my duties
    in this dysfunctional environment, nor am I being paid to do so. Like you,
    I was asked to work for an annual salary of $1, and I agreed out of a sense
    9 Ibid.
    10 Ibid.
    11Anonymous, The AIG Mess Gets Worse, Business Week (4125) (April 6, 2009): 6.
    12 Smith, Weisman, and Pleven, Some at AIG Buck Efforts to Give Back Bonus Pay, C1.
    13 Ibid.
    14 Ibid.
    15 Ibid.

    of duty to the company and to the public officials who have come to its
    aid. Having now been let down by both, I can no longer justify spending
    10, 12, 14 hours a day away from my family for the benefit of those who
    have let me down.16

    With respect to his intention to not return the retention bonus, DeSantis wrote,

    I have decided to donate 100 percent of the effective after-tax proceeds of


    my retention payment directly to organizations that are helping people
    who are suffering from the global downturn. This is not a tax-deduction
    gimmick; I simply believe that I at least deserve to dictate how my
    earnings are spent, and do not want to see them disappear back into the
    obscurity of A.I.G.s or the federal governments budget. Our earnings
    have caused such a distraction for so many from the more pressing issues
    our country faces, and I would like to see my share of it benefit those truly
    in need.17
    DeSantiss Op-Ed piece stimulated much discussion regarding the proper response to the
    retention bonus fiasco. Did DeSantis do the right thing?
    This case was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of
    Christian Business Ethics and Professor of Management, College of Business Administration,
    Valparaiso University.
    Discussion Questions
    1. What types of work behaviors did AIG intend to encourage through its retention bonus plan?
    2. Which needs seem to be important to the employees of AIGs Financial Products unit?
    3. Using the model of the individual-organizational exchange relationship, explain the
    relationship that employees of AIGs Financial Products unit believed they had with the
    company. How was this exchange relationship violated?
    4. Which motivation theory do you think has the most relevance for understanding the
    responses of the Financial Product employees to the implementation and unraveling of the
    retention bonus plan? Explain the reasoning behind your answer.

    16 J. DeSantis, Op-Ed Contributor: Dear A.I.G., I Quit!, NY Times.Com,


    http://www.nytimes.com/2009/03/25/opinion/25desantis.html (accessed July 2, 2009).
    17 Ibid.

    5. The amount of compensation earned by executivesas well as by professional athletes and


    famous actors/actresses and musiciansoften sparks emotionally charged debate. Do you
    believe the $1 million plus retention bonuses received by seventy-three employees of AIGs
    Financial Products was excessive? Why or why not?
    6. What would you have done if you were one of the seventy-three Financial Products
    employees who received a retention bonus of $1 million or more? Explain the reasoning
    behind your answer.

    Answers
    1. The AIG did not link the bonus to the performance and I believe
    that the work behaviors were not related to bonuses and the same
    could be said about the performance.

    2. Need of retention in job was important to employees super added


    with the bonus paid to them annually.
    3. Any given employee of any organization when once employees the
    bottom line is that the employee will perform and his performance
    will lead to some financial benefit to the company and in response
    the company pays him back with the monthly or annual salary. I f
    performance is good it is supported by the bonus or promotion to
    higher position. But the financial product unit employees believed
    that their performance was not truly acknowledged by the
    company. They are performing with the best interest of the
    company but not being looked after in the right manner.
    4.

    Hertzberg or the equity theory

    5. The bonus seems to be excessive but now days the entire focus has
    been shifted to the individualism and the core competencies

    whether for person or organization. The heavy amount of bonuses


    paid are unrealistic for general public and any common man but I
    believe that the financial benefit such large organizations gather as
    a result of the performance and sometimes only the mere presence
    of such individuals is far more than what is paid in the form of
    bonus.
    6. Naturally if I would have been rewarded that much I would do
    anything for the company and make all out possible effort to make
    the company the biggest success of the market.

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