AIG CEO Edward Liddy, facing tough questions from a congressional panel reviewing the government-subsidized firm's $165 million in bonus payments, said the insurance giant only handed out that money to retain key staff at its disastrous financial products division. He refused, quite noticeably, to use the B-word.
"AIG has made a set of retention payments to employees based upon a compensation system that prior management put in place at the end of '07 and the beginning of 2008," Liddy said. "This is the only way to improve AIG's ability to pay taxpayers back quickly and completely and the only way to avoid a systemic shock to the economy that the U.S. government help was meant to relieve."
"Retention payment" may lack the fat-cat connotation that "bonus" has acquired lately, but the word choice has raised eyebrows before.
On Tuesday Sen. Bob Menendez announced that he wanted the Obama administration to try to block "retention awards" designed to retain financial advisers at Morgan Stanley and Smith Barney who stayed on for a joint venture between the two companies. The New Jersey Democrat considers such a payment nothing but a "creatively titled bonus."
"These payouts constitute misuse of taxpayer money and are an insult to hardworking families who are saving every penny and changing their way of life just to get through this financial crisis," Menendez said in a statement. In a letter, Menendez asked Treasury Secretary Timothy Geithner to try to stop Morgan Stanley's retention awards along with AIG's bonuses.
But is there, as Menendez claims, essentially no difference between a bonus and retention award? Morgan Stanley maintains that its awards, nine-year forgivable loans with clawback provisions, are essential to keeping their financial advisers, who are subject to aggressive poaching by competitors. Financial industry consultants say retention awards are a necessary expense reflecting an unusually competitive recruiting climate.
"The need for retention packages is all about the fact that we are in the most competitive market we have ever been in for recruiting top financial advisers," says Mindy Diamond, president of Diamond Consultants, a New Jersey-based consulting firm that specializes in placing financial advisers.
"If there were no retention bonuses the level of attrition would be enormous," Diamond says. "I think [Senator Menendez] is not seeing the whole picture."
Andy Tasnady, founder of Tasnady & Associates, a consulting firm that designs compensation packages, calls Morgan Stanley's retention awards "golden handcuffs."
"Each individual adviser can be thought of as a small business unit," says Tasnady. A retention award that keeps an adviser with a firm is an investment because retaining the adviser keeps the adviser's clients' assets with the company. "The amount of the award sounds like a large amount, but spread out over the nine-year term they're getting paid it's only a small percentage of what they bring in."
Employees at AIG Financial Products are not financial advisers. And a look at the numbers shows that 20% of the "retention" money went to people who left the company.
Liddy said his company's retention awards were only for employees necessary for winding down that division. He added that he had asked award recipients to return some of the money.
"I've asked those who received retention payments in excess of $100,000 or more to return at least half of those payments," he said. "Some have already stepped forward and offered to give up 100% of their payments."
UPDATE: As a commenter points out, Liddy did, in fact, use the B-word during questioning.
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