Bonuses Raise Hackles When Firms Take U.s. Aid, Cut Workers


April 17, 2009|By HANAH CHO | HANAH CHO,

Retention bonuses have become the new sore spot for many workers, who are angry that companies receiving federal bailout money are doling out millions in such payments to persuade executives to stay at their jobs.

Insurer American International Group paid $165 million in retention bonuses, while mortgage finance giants Fannie Mae and Freddie Mac plan to pay more than $210 million to more than 7,600 workers.

At least 19 financial firms that have received government money promised to pay certain executives to remain at their jobs, according to an analysis by a compensation research firm that was commissioned by The New York Times.

Even when taxpayer money is not involved, political and public backlash is harsh.

Constellation Energy Group reversed its plans to guarantee up to $32 million in performance and retention incentives after the issue became a distraction to its efforts to get approvals of its partnership with a French utility, which agreed to buy half of the company's nuclear power business.

Electricite de France, which had agreed to make the incentive payments, will still pay up to $32 million to the Baltimore company if the deal closes, but the money will be diverted to general business expenses.

(As a side note, the company insisted that the payouts were not bonuses because they represent long-term performance and not the past year's results.)

Chris Hamilton, a senior executive compensation consultant at Watson Wyatt, says companies use retention bonuses to keep employees under specific situations such as mergers and acquisitions, bankruptcy and liquidations, as well as to fill critical jobs.

"A good example is the bankruptcy of Circuit City, which had used [retention bonuses] for some of their people as they wound down," Hamilton says. "You don't want to lose everybody when you announce you're going out of business."

Still, Hamilton says he understands the public's frustration when it comes to such bonuses.

"Some of the things are dubious because there are companies giving retention programs or bonuses at the same time they are laying off employees," he says. "You have these conflicting indicators."

Lemma W. Senbet, who holds the William E. Mayer Chair of Finance at the University of Maryland's Robert H. Smith School of Business, says even retention bonuses should be tied to performance.

"It's a presumption that when I retain you and recruit you, you'll perform," says Senbet, who studies executive compensation issues.

Senbet says he's glad to see debate over executive compensation reform amid the uproar over the AIG payments.

Senbet, though, warns against too much government intervention.

"To be frank, I'm not crazy about retention bonuses, unless they're designed properly," he says.

One way to improve bonus programs is to provide such payouts in stock grants that vest over a period of time, he says.

"Then if you perform, you get it," Senbet says.

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