Posted on: March 19, 2009 10:50 am

A bonus track on the CD of life


AIG's executives really blew this one, paying out excessive bonuses to the executives who largely are to blame for the management practices that led to the downfall of the insurance giant. Insert your public outrage here. I am hearing folks demanding action as populism calls its politicians to task, finally I might add. But before you call your politician and demand they do something to get the money back or to stop such payouts in the future you have to understand there are contracts involved. Right, wrong or indifferent there are legally binding contracts that stipulate the size of a bonus based upon deliverables within a company's framework.

But the outrage is there. Populism is demanding an end to this "unfair" practice. Bonuses are being villified as unfair. But let's change the word. Instead of calling it a bonus, let's call it what it is - an incentive.

In the sports world we all understand athletes have contracts that are often laiden with incentives. Do this by this much and we pay you this much. Athletes have guaranteed money plus incentives. They get the guaranteed cash even if they get hurt and the incentives if they perform. Sometimes these contracts are written such that it is so easy to reach the incentives, like play 10 games in an NFL season. Stay relatively healthy and you get that incentive. Pretty simple. In baseball, get 400 at bats and there you are. You get the idea. Do you have a problem with these contracts? Because there may be no emphasis on individual performance or team winning.

In the real world there are all kinds of incentive contracts that are in effect. Commission sales is the most obvious. But so is waiting tables for tips. If service is good a nice incentive is earned. The customer is not obligated to tip mind you. The waitress is obligated to give exceptional service to earn her incentive. In the case of a commission salesperson, the guaranteed money is barely enough to live on. The commission is critical to the survival of the saleswoman. Incentives are there to drive the right behavior - maximize sales, improve customer service, improve efficiency, etc. As customers or stockholders we all like incentive contracts because it drives behaviors in the right direction.

I must confess. I am an executive at my company and I have an incentive contract. I get paid a guaranteed amount of money, my base, and I get an incentive bonus that can be lucrative (not by major league standards). In 2008, our first three quarters were strong and profits were outstanding. Our fourth quarter tanked like everyone else. Overall, we had a good year. But as the economy continues to drag on we have made personnel cuts. We are sharply cutting spending. We are doing everything in our power to weather the storm. But - we paid our executive bonuses. They were the smallest they have been in years, but we paid them. We discussed whether we should pay them. Some folks wanted their money. They felt they had earned it and by all rights, they had. Others felt is was bad form to pay the bonuses in light of layoffs. I tended toward the latter group but I will tell you I cashed the check they sent me. The discussion was ended when we were reminded that we were under contract to pay the bonuses. The company would not violate it's end of the bargain. The bonuses were earned based on the governing inputs (profit, market share, customer satisfaction, etc.) and we would get paid the money. We were also reminded that some people would make a court case out of it if they were not paid what they had earned. A true statement. Regardless, the company had met its objectives.

So, what do we do? Do we allow our politicians and bleeding hearts make it passe to accept a bonus? I remind you incentives are earned not accepted. Before you answer, I worked approximately 3000 hours last year and traveled 114 days out of the year. I worked while on vacation. I worked while I watched sporting events on TV. I worked in the airport, on the plane, in the hotel, at the pool - you name it and my Blackberry or laptop was on line and I was available. Sure I traveled to Europe but not with loved ones and they were not vacations. Twelve to fourteen hour days are average. The glamorous life it is not.

And my last point. The federal and state governments took a combined 41% of it. To use however they see fit. Paying for stuff I don't want. I earned it and they took it.

Incentives are good, right?

Category: NCAAB
Tags: Incentives
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