What Constitutes a Bonus?

Andrew Cuomo, the New York state Attorney General, says he's persuaded a number of A.I.G. executives to return bonuses that were paid to them out of funds the government used to bail out the insurance giant. I asked one of my friends who works at a consulting firm in New York to explain to me why A.I.G. went ahead and paid out the bonuses, and why the people who received them felt justified in accepting them. Basically what he explained is that the compensation system is such that employees' contracts include a base salary and bonuses that are an expected part of what they make each year. In other words, bonuses aren't really bonuses. They aren't really paid out according to performance--it seems like you have to seriously screw up not to get your "bonus."

This is the same problem with the so-called retention bonuses paid to some high-ranking federal employees a couple of years ago. It wasn't ever clear that those employees had offers to leave, or if they had offers, intended to take them. The retention bonuses weren't really aimed at retention, just as the Wall Street bonus system isn't actually based on extraordinary performance.

The solution--for Wall Street, and for the federal government--isn't really to claw back bonuses. It's to determine what compensation schemes actually provide incentives for extraordinary service, and what levels of service ought to be rewarded by extraordinary compensation. The A.I.G. fiasco ought to, and is, provoking conversations about what kind of executive compensation is appropriate in the private sector. But it ought to be sparking conversations about what kinds of compensation are effective in the federal government as well.