Friday, March 20, 2009

How Wall Street Works: Bonuses Aren't Bonuses

[C]ompanies play these games because they think it would be unseemly for investors to know how much they are paying managers for just doing their job. Companies think executive talent is far more important than financing, so they want to pay executives a lot of the profits that might otherwise go to investors. But they try to have their cake and eat it by portraying the pay as performance-based. Now the extraordinary attention over AIG is showing the phoniness of of most incentive plans.

The editor of the Harvard Business Review, John T. Landry, explains that the payments to the AIG executives really were salary rather than bonuses. They only call them bonuses in order to convince investors that they are somehow based upon performance. AIG did not want anyone to know the ungodly sums of money it was guaranteeing to its executives regardless of how well the company did.

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