Bentzen’s Blog

Bonusgate
by Brian Bentzen

AIG has done it again.  The American people are angry, the Obama administration is scrambling, and the AIG executives are rich.  The truth is buried in the stimulus bill, the Declaration of Independence, and in Supreme Court decisions.  These bonus contracts are valid, and the government cannot force AIG to abrogate them, despite the bad politics.  As a citizen, you have a right to enter into such contracts without fear of government intervention.  Only under bankruptcy procedings can a corporation be forced to renegiotiate contracts.  By infusing capital into AIG and effectively preventing their bankruptcy for the time being, our federal government has allowed AIG to honor its contracts.  If there had been foresight to demand renegotiation of such contracts in exchange for the bailout, the current political mess and public outrage might have been avoided.  Any intervention on the part of the government will serve to alienate a large population, but failure to do so will anger everyone else.

First, let us examine the so-called reasoning for these bonuses.  These bonuses are not performance bonuses.  They are retention bonuses, designed to keep the employees who caused the problems working at AIG so they can unravel the complex contracts they created.  To fix the problem quickly, AIG decided these people need to keep their jobs, and rewarded them more than handsomely to keep them at work.  According to Wikianswers.com, “A Retention bonus is an incentive paid to a key employee to retain them through a critical business cycle. This could be a transitional period (such as mergers and acquisitions) to ensure productivity or to meet a critical milestone. It has proven to be a very good tool in persuading employees to stay.”  The ethics of this sitation can be debated but it is legal.

The Obama administration and Congress want to prevent these bonuses.  They can’t, however, intervene and break the contracts.  Remember that we are first a country of free people with certain unalienable rights, including Life, Liberty and the Pursuit of Happiness.  The pursuit of happiness includes your right to freely enter into business contracts and any legal business of your choosing. 

As in our intercourse with our fellow men, certain principles of morality are assumed to exist without which society would be impossible, so certain inherent rights lie at the foundation of all action and upon a recognition of them alone can free institutions be maintained. These inherent rights have never been more happily expressed than in the declaration of independence, that new evangel of liberty to the people: “We hold these truths to be self-evident” — that is, so plain that their truth is recognized upon their mere statement — “that all men are endowed” — not by edicts of emperors, or decrees of Parliament, or acts of Congress, but “by their Creator with certain inalienable rights” — that is, rights which cannot be bartered away, or given away, or taken away, except in punishment of crime — “and that among these are life, liberty, and the pursuit of happiness, and to secure these” — not grant them, but secure them — “governments are instituted among men, deriving their just powers from the consent of the governed.”

Among these inalienable rights, as proclaimed in that great document, is the right of men to pursue their happiness, by which is meant the right to pursue any lawful business or vocation, in any manner not inconsistent with the equal rights of others, which may increase their prosperity or develop their faculties, so as to give to them their highest enjoyment.
 - U.S. Supreme Court Associate Justice Stephen Johnson Field, Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746 (1884)

Any intervention to force AIG to break the contracts would almost certainly lead to a long court battle that might make its way to the Supreme Court.  The alternative currently in discussion is passing a law that would essentially create an AIG bonus tax.  This again is a poor precedent, but the bill will probably pass easily.

HR 1, the American Recovery and Reinvestment Act of 2009 attempts to set limits on executive compensation.  One amendment states, ‘‘(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.  The bonuses that are causing a public uprising and death threats against AIG employees are valid, so long as they were signed before February 11, 2009.  The amendment that protects these bonuses was supposedly written by Senator Dodd (Dem – CT), although he denies including this in the bill.  If Congress hadn’t been in such a rush to pass the bill, perhaps more members would have actually read the bill they passed before voting on it.

It appears there is little that the government can do to stop these bonuses.  If they intervene illegally, any American who cares about his rights will reject the current majority.  If they fail to intervene, they will illicit the anger of the current majority of voters.  It seems that the right thing to do is to let the AIG employees receive their bonuses.  Whether they deserve the money or not is not up to our government.  The US government cannot and should not intervene.  The AIG executives who are receiving their bonuses should decide what is best and perhaps a few will refuse their pay.