Show Me the Money...Outrage over AIG Bonuses Text Size:

In 2008, American International Group (AIG), the largest US insurance company, was rescued from its financial woes. Taxpayers footed the $150 billion bailout. AIG is now 80% government-owned.

On March 1, 2009 the Federal government promised AIG another $30 billion. AIG had a $61.7 billion quarterly loss. Without help, it's claimed AIG would have collapsed, resulting in a global financial crisis.

Bonuses for a Job Not Well Done

In March, shocked taxpayers found out that a large chunk of the rescue money went to AIG employees. Americans, struggling with the bad economy, are outraged.

AIG claims that bailout funds paid for employee retention bonuses. Such bonuses are used to retain employees who are important to ongoing company operations.

Putting the Genie Back in the Bottle

President Obama called for a return of taxpayer funds. Congress sought to legally "clawback" the money. According to the Merriam-Webster online dictionary, clawback basically means "to get back (as money) by strenuous or forceful means (as taxation)."

The House of Representatives proposed a 90 percent tax on bonuses paid out by any company that accepts more than $5 billion in bailout money. The President questioned the tax's constitutionality, and it was put on hold.

Employment Contracts and Clawback Clauses

The AIG bonus payments were guaranteed in employee compensation contracts. If AIG didn't pay, it risked lawsuits for breach of contract. This includes legal fees and possibly large damage awards.

A contract is breached when one of the parties to the contract fails to fulfill one of the contract's terms. AIG employee compensation contracts didn't provide for canceling or modifying bonuses.

Many companies are now inserting clawback provisions into employee compensation contracts. Such clauses can allow for recovery of employee compensation. Clawback clauses provide a possible defense in breach of contract lawsuits. It's important for clawback clauses to clearly and carefully spell out triggering events.

For example, a company could recover a bonus if it's based on job performance, and it's discovered that false information led to a bonus payment.

In the AIG case, the argument is that employees aren't entitled to bonuses because AIG didn't benefit from their actions. Instead, AIG risked bankruptcy due to the bad decisions of many of retention bonus recipients.

In the meantime, New York State Attorney General Andrew M. Cuomo has convinced 15 of the top 20 bonus recipients to return their bonuses, totaling about $50 million.

Other bonus recipients have thus far refused to return the funds. Some can't be found. Cuomo plans to pursue all US bonus recipients. However, Cuomo lacks the legal right to go after bonus money paid to those outside the US. About $80 billion or 47% of the bonus money went to American employees.

Treasury Secretary Timothy Geithner plans to recoup the AIG bonuses by recovering the money from company operations and deducting funds from the additional aid promised to AIG.

Prevention Strategies

Companies should be careful when drafting their employment contracts and include clawback provisions to avoid paying compensation when it hasn't been earned. If the Federal government continues to provide taxpayer money to failing financial institutions, it must review the terms of any existing employment compensation contracts to avoid another disaster like the AIG bonus debacle.

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