AIG Bonus Folly

The furor over AIG's bailout payment seems to me like missing the forrest for all the trees.  $150 million is a drop in the bucket, and while executive pay might be a good question for society to address in general, it's hardly the pressing problem facing AIG right now.  Where was the outrage this bonus season when Wall Street paid one of the highest total bonus pools in its history?

For $170 billion, maybe we could have just let AIG fail and apply the money towards propping up a more worthy competitor or startup.  I don't like the idea of pumping money into a failed business, thereby allowing everyone to escape from the consequences of their bad decisions.  Without consequences people do not learn, and bad systems are allowed to continue.  It is similar to my general opposition to many charities that serve only to continue failed states and social structures.  Don't get me wrong, I want to help people probably more than anyone -- I just don't think that aiding an organisation or society that can't feed itself is really helping anyone, rather it's just perpetuating the misery.

I would have liked to have seen all the bankrupt businesses simply fail.  I don't believe in this idea that these businesses are "too important" to fail.  If they are so important as to be essential to our shared survival, then they should be nationalized or heavily restricted like utilities, highways, and other public domain type services.  Otherwise, they should simply fail, and thereby clear the way for better organized competitors to take over.  If there was demand for their services, I am sure it would not take long for another company providing the same service to emerge.

But back to the specific issue of bonuses... I don't like Obama's repeated use of the word "greed", like it's a bad thing, or that people could somehow be "shamed" into different behaviors.  Greed is what got us where we are, greed is an integral part of our miraculous economic engine.

But suppose we truly want to start imposing salary caps, and for some goofy reason we don't want to do it the obvious way that Scandinavian countries use, which is a progressive tax on high wage earners ("taxes" are for some reason a dirty word in this country... people would rather get nickel-and-dimed to death than just pay for their government services transparently).

First of all, it's logistically and morally hard to cap a salary.  For example, if I start up a company that does well, how could someone else later step in and tell me not to pay myself so much?  It's my company!  Next, as the company grows, suppose I hire someone to be my right-hand man, and I come to rely on this person completely for all operational concerns... this person becomes irreplaceable.  I therefore decide to pay him a premium far above the normal wage, because in a sense this person has become an indispensible part of the company.  Now somebody is going to tell me not to pay him so much?  It's absurd.  And so forth down the line... it just doesn't make sense for someone else to try and second-guess how much my own employee is worth.

Now in a vast corporation like AIG, it's hard to know if any single employee is worth several million dollars in bonus money, but I wouldn't automatically assume that he/she isn't.  For example, if you work on a commission, and you bring in a boatload of sales, then it would be destructive to turn around and deny you your rightfully earned commission -- the next year you would not work as hard to bring in so many sales, which only ends up hurting the company's bottom line.  Therefore paying this bonus money might be a good investment for AIG to make.

You could make the argument that the difference in motivation between $1 million and $5 million is negligible -- they're both huge heaps of money, so anything paid out in excess of $1 million is a waste, and that might be true, I don't know.  But what is also true is that the "jackpot" system of payment can be cheaper than paying everyone proportionally -- Hollywood works on this principle.  Thousands of people work for pennies because of the hope that one day they might eventually get a Tom Cruise sized paycheck one day.  By giving out a few enticing super jackpots, thousands more can be motivated, at a reduced total cost, than if everyone were paid something more in the middle.

Similarly, we all know how crushingly insane the workload is for Wall Street hopefuls... they literally give up their lives to work 18 hour days for years and years, hoping to one day cash their first big Wall Street bonus.  It's exploitative in the extreme, so in a way I oppose it for the workers' own sake as much as for the rest of society.

Of course Wall Street is very highly paid in general even if you don't work hard (I know, I maintained an easy workweek there for many years).  But I think that's just a reflection on the fact that until recently there's just been a lot of money floating around... it has historically been a very profitable sector.