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Contracts and Bonuses

By   |  March 20, 2009

Contracts are the glue that holds our economy together and, in a broader sense, our society. If we ever get to the point where we can’t rely on the validity, predictability, and legality of contracts, everything else will deteriorate.

Think about it–contracts aren’t just legal agreements among businesses, labor arrangements between businesses and unions, and compensation agreements between businesses and executives. They’re ubiquitous in the lives of every American. When you buy a house, rent an apartment, finance a car, rent a car, get married, use a credit card, begin cell phone service, subscribe to cable TV, and engage in innumerable other activities, you’re using and relying on contracts. If you can’t depend on those contracts to be honored, and if you don’t have legal recourse to a judicial system that will ultimately enforce contracts, your life will descend into chaos.

All law school students study contracts. By the time they become lawyers, they understand contracts. The largest professional group among members of Congress is lawyers, at about 40 percent of the total. The President of the United States is a lawyer, and presumably a smart one, having been such an outstanding law student that he was elected President of the Harvard Law Review, the highest honor a student can attain at Harvard Law School.

How is it, then, that in this agglomeration of legal expertise in Washington, so many don’t seem to understand the basics of contract law?

That brings us to the contracts between AIG and some of their executives for the payment of bonuses. The bailout/stimulus bill passed recently provides that contracts in force at that time must be honored. The AIG contracts existed long before, and that fact was open and available to everyone. Senator Chris Dodd was responsible for the language in the bill protecting contracts, and he had input from the Administration on that provision. Dodd himself now admits that. All the members of Congress who voted for the bill also voted to honor contracts like those which result in AIG executives receiving retention bonuses.

So what’s going on when the President, who signed the bill, very publicly expresses his outrage at the fact AIG is paying these bonuses? When members of Congress, most of whom voted for the bill, express the same outrage before any TV camera in their vicinity and in long harangues during committee hearings? Are our leaders uninformed and incompetent, or are they shamelessly pandering to the mob? We can all decide for ourselves which is true. In either case, the result is a major distraction from solving the economic crisis, an enraged if uninformed public, and death threats directed at AIG and its employees.

The government, as the White House has acknowledged, can’t force these contracts to be abrogated. Passing a tax law promoted by Dodd that confiscates all or most of the bonuses from a few specific individuals is almost certainly unconstitutional. And comes Representative Barney Frank, along with Dodd a major culprit in this whole economic fiasco, asserting that since “we” (the government) now own the company, we can do whatever we want.

These bonuses are a small issue compared to the totality of the economic crisis. Yet we have the President and Congress seizing on it to whip up the public because, it would seem, they don’t have a clue what else to do. Our leaders are playing a mass violin concerto while the economy burns.

There’s no excuse for the ignorance that characterizes the people sending threats to AIG and the people lobbing firebombs across the blogosphere, not to mention the politicians instigating them. All the information necessary to understand what’s really happening is readily available in the media, including media outlets not normally considered to be pro-business. Here are just a few sources:

Washington Gone Wild, Washington Post Editorial
House Passes Heavy Tax on Bonuses at Rescued Firms, The New York Times
House passes bill taxing AIG and other bonuses, AP/
Obama’s AIG Panic, The Wall Street Journal Opinion Journal
Sen. Dodd Admits Adding Bonus Provision to Stimulus Package, Fox News
Dodd Blames Obama Administration for Bonus Amendment,
Pelosi: Don’t Blame Us for AIG Mess, Capitol Briefing, The Washington Post
The Gift That Keeps on Giving, New York Times Editorial
Grassley on AIG execs: Quit or suicide, Politico
Rage at AIG Swells As Bonuses Go Out, The Washington Post

(This article was also posted at Opinion Forum.)

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3 Comments on “Contracts and Bonuses”  (RSS)

  1. Many of these contracts are set up by the people they benefit, so in a sense therefore the benefactors are expecting the company to honour a contract that is forced upon them. The old saying “A fair days pay, for a fair days work” should apply. As regards the whole issue of it being a ploy distract from the issue of the bailouts, I agree, but as long as the situation is being used as a ploy, then this is the time to take the opportunity to make sure that these kinds of platinum parachutes don’t work in the future, after all the contract should not read “yes you will get (insert amount here) regardless of how badly you fuck up, instead it should read ” if you fuck up we will take you too the cleaners and leave you in a homeless shelter along with all the employees whose lives you have just reuined, on the other hanf if you do a good job we will give you a bonus based on a sliding scale that gives x% for the growth of the business”, or something like that. While it may put off some people it sure as hell will give them an incentive not to fuck up, also you might find that the only ones willing to take that chance are the ones who actually know what the hell they are doing.

  2. I understand your concerns. I didn’t say that I support the bonuses or that I think these particular executives should receive bonuses. In general, I think corporate executive compensation has gone out of control in the last couple of decades, and the ratio of executive pay to lower-level employee pay is way too high. Whether you would fix that by direct government control of business, laws that discourage overly high executive pay, or reliance on stockholders to control company policy are valid questions but aren’t what I addressed.

    My point was the importance of contracts and the necessity for their being honored. In addition, I’m concerned that obsession with these bonuses, which constitute a very tiny percentage of the money being spent on bailouts, distracts attention from much more important issues.

  3. Whilst it is true to say what you have written, it is also fair to say that these bonuses were not earned and I doubt that the government loans included the fat cats paying themselves off with the governments money. These bonuses may have been eligable under the existing state of finance at the time they were prepared but while you proclaim them as unconstitutional, they sure as hell are not moral or ethical, face it the ones you defend are the ones who have managed to wreck havoc amongst the everyday workers lives and then feel justified in driving off in their limo(whatever) and taking with them enough money to see a lot of workers (whose lives they have ruined)out of debt, and making sure that they don’t run down to their last million. In a sense it’s kind of like the husband who kills the wife for the insurance money, yes he was promised that in the event of his wife’s death he would receive the half million payout, but when he’s found out to have killed her himself you sure as hell wouldn’t expect the insurance company to go, “well we know he killed her, but we did promise the money if she died”. Before you say it, yes I know it’s not a precise analogy, but frankly it’s 5am where I am, i’m tired and it’s close enough for me
    To sum up, if you fucked up and did not do what you were supposed to, then you do not deserve the bonus, even if it is signed in blood with god, allah, buddha, vishnu, etc as witnesses!

    P.S. Sorry if there are any mistakes or inconstancies, i’m knackered and off to bed, have a great weekend. =)

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