I suspect you are well aware of the big brouhaha concerning the bonuses AIG paid to company executives.
Before we throw the baby out with the bath water concerning salaries and bonuses, I want to lay some things on the table for your consideration.
We must be careful not to paint with a broad brush or get in such a feeding frenzy that corporations start determining salaries and bonuses based on opinion and not facts.
I agree there are bad boards and worse management teams involved with some of these companies that have received bailout dollars. But there are also banks and mortgage companies doing it the right way. As a matter of fact, community banks seem to be doing very well, but increased insurance fees and other penalties imposed by the government, due to the bailout, will hit them in spite of the fact they did not cause the meltdown. Oh, by the way, community banks are still lending to small businesses, commercial banks aren't.
I was opposed to taxing the bonuses AIG executives received. For Congress to impose a specific tax aimed at specific bonuses after the fact is wrong, and puts us on a very slippery slope. Also, it is unconstitutional.
Under certain conditions, I support executives getting bonuses. Productive executives being awarded bonuses is a good thing. However, bonuses should be based on several performance parameters.
One, the management team and executive compensation should be aligned with the interest of the shareholders of the company. If the shareholder's stock performs well, the executives should do well. I remind you, the shareholder's stock is in the tank at AIG. Such an alignment is necessary so management and executives will create long-term growth in the value of the company's stock. Hence, personal wealth and bonuses evaporate when stock prices decline.
Two, compensation should always be tied to strong performance. I am not an investment advisor, but Joe Sixpack and Sally Doe Stockholder should always look for strong annual and long-term business performance. I have no problem with compensation that provides strong rewards for executives' strong performance.
Again, how can the company be performing if it's underwater? Or if it's going bankrupt?
Three, a feature that's been discussed in recent weeks has been "retention of employees." This is an important and essential compensation tool. Successful companies are no different than the Cleveland Cavaliers with LeBron James, the Los Angeles Lakers with Kobe Bryant, or the Indianapolis Colts with Peyton Manning.
If LeBron and Kobe are averaging 28 points and 10 rebounds every night, and Peyton is passing for 300 yards and four touchdowns every game, the management and the fans want to retain these guys.
It's no different in corporate America. When you find top-notch talent, you want to retain it and make sure that LeBron James doesn't end up with the New York Knicks or the Chicago Bulls or Peyton Manning doesn't end up playing for the Tampa Bay Buccaneers.
For a company to realize its potential, meet customer expectations, and maximize value for its shareholders, these three things are important.
There are other things that go into executive compensation packages, but these are a few that seemed to be lacking in terms of the bonuses and compensation surrounding AIG.
My theory is pretty simple and based on common sense. If a company is going under and can't pay bonuses with profits, why should they pay bonuses with taxpayer bailout money?
There are two other things that bear mentioning.
It seems with executives getting so much bonus money, I can't help but wonder if all salaried employees and the rank and file work force are getting bonuses? It makes sense in my mind to align executive bonuses with all salaried employees and the work force. Companies shouldn't just allow executives to reap the benefits of strong company performance.
Finally, I'd like to address an issue I've not heard much discussion about this bonus bonanza. That is the "clawback" policy enlisted by many companies outside Wall Street. This policy allows the corporate board to recover compensation of certain employees in certain circumstances if financial statements are inaccurate or re-stated. This clawback policy did not apply to Fannie Mae or Freddie Mac executives who all got bonuses after earnings were re-stated and evidently it wasn't in the compensation governance of the banks that received bailout money.
I'm all for executives being handsomely compensated, but there should be benchmarks in place for bonuses and salaries, and what we've seen recently on Wall Street should not taint all CEOs in America. Maybe there were benchmarks in place at AIG, but they had to be pretty low.
It does help, however, when Wall Street types realize that an executive doesn't deserve a bonus just for breathing the company air.
J.C. Watts (JCWatts01@jcwatts.com) is chairman of J.C. Watts Companies, a business consulting group, and former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002.