As most of the world knows, the AIG bonus situation is quite a sore spot for the United States right now. Even though the company received $182 billion in bailout money, AIG will have distributed $165 million in bonuses total to over 400 executives by the end of March. The bonuses were written in a contract created in late 2008, so there is a limited amount of options the government can take at this time.
There are two aspects of the solution that the government should look toward. The first involves incentives, meaning that the original intention of this bailout was to help save a company that the country’s commerce depends upon. The media has already begun demonizing every executive at AIG, even though many of them are opting out of the bonuses. What this means for the future of the company is not difficult to predict. Employees from AIG will seek jobs at other companies, whose names might not bear the same stigma. The company will soon lose the most talented individuals who were able to find other positions, possibly resulting in a worse performance than if those employees had stayed. This is not what the United States was originally hoping for when they signed off on the bailouts.
The second aspect of the solution deals with the constitutionality of government intervention in such a situation. Obama has been evaluating the house’s bill, passed last week, which will place a 90% tax on bonuses received by employees with salaries above $250,000 at companies receiving federal aid. This is a pretty serious move by the House, it is essentially breaking a contract that the US government approved quite a long time ago.
Obama himself said on 60 Minutes that, "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly don't want to use the tax code...to punish people."
Whether the bonuses are ethical or not, it is no small matter if the government uses the tax code to sidestep contracts. Let’s see what Obama decides…