Unethical people are unethical regardless of bonuses.
Liars lie, and cheaters cheat just because they think they can get away with it. Bonuses without ethical constraints give permission to do more of what they do already.

The most effective bonus programs have tight guidelines for ethical results.
If the bonus is for results only, then you often get unintended results.

I have worked in organizations where bonuses made up a large portion of compensation. The dilemma is deciding in the moment to "do the right thing" or go for the result with the $ payoff. For me, I have to live with myself long after that bonus may be spent and doing less than "the right thing" didn't make sense.

For others, there is no dilemma...liars lie and cheaters cheat.

posted March 16, 2009

Good Morning Frank,

In many situations, the bonus is linked to the performance of the indivual, not the overall performance of the company. I managed 23 location for a Forture 500 company who's national headquarters was located in Orlando, FL. My division had sales of approximately $180,000,000.

As an example, I'm a Certified Credit Executive® (CCE®), which is NACM's executive level designation, endorsing its achievers as capable of managing the credit function at an executive level. Candidates must pass a rigorous, four hour exam which tests application skills in the areas of accounting, finance, domestic and international credit concepts, management and law.

The bonus criteria implemented through our company required we have a minimum I.B.T. (income before tax) of 20% in our region. We had to have an increase in sales of 15% over the prior fiscal year. Our recovery of bad debt from the prior Fiscal Year had to be a minimum of 40%, and lastly, we had to collect a minimum of 55% of the service charges billed on all past due accounts.

With the sales of $180,000,000, my bad debt had to be below $90,000 for the fiscal year. I was fortunate in that my bad debt was approximately $46,000, I collected $987,000 in service charge/interest income for the business, sales in my region increased by 26.45%, and the I.B.T was 20.80% for the year. As a result, I was given a bonus equal to 25% of my base salary.

Our company had a Water & Sewer division, which included Fire & Fabrication and Concrete, Electrical Division, Building Materials Division, Plumbing Division, Bath Style & Light Style Division, and Pool & Spa Division; just to name a few.

While many of the divisions were profitable, our Pool & Spa division wasn't reaching the goals the company had set for their minimum IBT. The division was sold to another company as a result.

With AIG, the business was not making a profit, but the locations managed by those receiving a bonus may have met company criteria. I also, feel that the overall business should have mimimum goals for profit & growth before haveing out unnecessary bouses. Please let me know your thoughs.

Sincerely

posted March 16, 2009

Bonuses as I see them should be a reward for exceptional achievements of an individual, in a company that was able to profit from it. Current bonus-systems seem to have a number of flaws:
* a poor performing company (ike AIG) pays bonuses to individuas, in spite of the companies financial state.
* bonuses seem to be a part of the normal renumeration policy. Workers count on it as part of their regular salary, and nobody seem to have the courage to change this policy. Consequently, we keep on paying bonuses in poor performing companies.
* the bonus systemacy seems to reward the wrong type of behaviour (e.g. volume of mortgage-contracts instead of "safe mortgage volume"), thus rewarding behaviour that ultimatey undermines a companies health, qand ultimately our economic system.

As a consequence of these factors, we are, globaly, in great trouble.

So yes, probably bonuses do foster unethical conduct?

posted March 16, 2009

Bonuses do not in and of themselves inspire unethical conduct. It is the
structure of how a bonus is earned that leads to unethical behavior. When a person has no dowside bonus potential...as these execs have it structured due to a lack of supervision by the board of directors. Noe of the people have a potential to lose money if the company doesn't do well. I think that bonuses may need to be structured over the life of the contract of a firm. Yearly numbers are simply to easy to fudge. When people can get a bonus by laying other people off it leads people to not have a desire tocare for the company as is their fiduciary duty. The mere fact that AIG or any of them will take bonuses shows a remarkable lack of moral compass. My question is why are these people still employed? Bonus! They should all be fired & their golden parachute given to the workersand investors they failed .

posted March 16, 2009

Yes, bonuses CAN foster unethical conduct, but the real culprits are unethical people.

What is needed with any bonus/referral/commissioned transaction is the proper oversight to make SURE things are done ethically. My sales force works on commission only, and the basic rule is: When I get a check, you get a check. This means that the client is satisfied with the service and inhibits sales from making promises they can't fulfill or trying to pull a fast one on any of us. So far, diligence has worked well.

posted March 16, 2009

In my opinion, all cash bonuses should be abolished.

Pay the person what they are worth and expect them
to perform. If they exceed expectations, then they
strengthen their chances of promotion.

To say that one must pay a bonus to prevent people
from leaving, as AIG now claims, is utterly absurd,
and indicates how far off track the entire business
world has gone.

Bonuses are now a bad word. It indicates weak
management which has no clue how to achieve
results without giving out million-dollar candies.

Companies which dole out cash like this should
be censured and avoided by investors until they
get a grip on reality.

Look, the salary of the President of the USA is
US$400,000 per year, with no bonuses.

Show me one executive who carries more
responsibility or who is more accountable.


-----------------------------

FRANK FEATHER
Global Business Futurist and ex-Banker
~~ "A Future You Can Bank On!" ~~
Website: http://FFeather.com
e-Mail: Frank.Feather@Gmail.com

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posted March 16, 2009

AIG has a lot of chutzpah to do what it's doing.
Any contract can be changed, lots of companies have gotten rid of the bonuses this year.

The head of AIG says that the bonuses are necessary to insure that their talent won't go anywhere else.

ANYWHERE ELSE?

There aren't any other jobs out there. Where the hell are they going to go?

Waiter, check please....

posted March 16, 2009

Possibly because GAO didn't think SEC was doing anything, they started a database of public company financial filings (even 300% increase since SOX, compared to 90s):
http://www.gao.gov/special.pubs/gao-06-1079sp/index.html

from above:

The database consists of two files: (1) a file that lists 1,390 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between July 1, 2002, and September 30, 2005, and (2) a file that lists 396 restatement announcements that we identified as having been made because of financial reporting fraud and/or accounting errors between October 1, 2005, and June 30, 2006.

... snip ...

Executives have been fiddling the filing numbers to boost their bonus ... financials might later be refiled, but the bonuses not forfeited.

There was study last fall of 270 corporations that redid their executive compensation plan after having problems with financial filings (to eliminate executive motivation to fiddle the numbers).

The same deregulation was implicated in both ENRON and AIG. Congress passed Sarbanes-Oxley in the wake of enron ... but didn't correct the underlying problem that then resulted in AIG.

25 People to Blame for the Financial Crisis; Phil Gramm
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877330,00.html

from above:

He played a leading role in writing and pushing through Congress the
1999 repeal of the Depression-era Glass-Steagall Act, which separated
commercial banks from Wall Street. He also inserted a key provision
into the 2000 Commodity Futures Modernization Act that exempted
over-the-counter derivatives like credit-default swaps from regulation
by the Commodity Futures Trading Commission. Credit-default swaps took
down AIG, which has cost the U.S. $150 billion thus far. ... snip ..

Gramm and the 'Enron Loophole'
http://www.nytimes.com/2008/11/17/business/17grammside.html

from above:

Enron was a major contributor to Mr. Gramm's political campaigns, and
Mr. Gramm's wife, Wendy, served on the Enron board, which she joined
after stepping down as chairwoman of the Commodity Futures Trading
Commission.

... snip ...

Phil Gramm's Enron Favor
http://www.villagevoice.com/2002-01-15/news/phil-gramm-s-enron-favor/

from above:

A few days after she got the ball rolling on the exemption, Wendy
Gramm resigned from the commission. Enron soon appointed her to its
board of directors, where she served on the audit committee, which
oversees the inner financial workings of the corporation. For this,
the company paid her between $915,000 and $1.85 million in stocks and
dividends, as much as $50,000 in annual salary, and $176,000 in
attendance fees, according to a report by Public Citizen, a group that
has relentlessly tracked Enron, which in turn has called the report
unfair.

... snip ...

Greenspan Slept as Off-Books Debt Escaped Scrutiny
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aYJZOB_gZi0I

from above:

That same year Greenspan, Treasury Secretary Robert Rubin and SEC
Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of
the Commodity Futures Trading Commission, to study regulating
over-the-counter derivatives. In 2000, Congress passed a law keeping
them unregulated.

... snip ...

one of the articles from the period mentioned that House passed the
bill ... and even before the copy of the bill was distributed in the
Senate, the Senate passed it unanimously. Also Born (as chairman) must
have been fairly quickly replaced by Gramm's wife (before she resigned
the position to join Enron).

Enron, Worldcom, deregulation, & repeal of Glass-Steagall also
investigated by PBS:
http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/

posted March 16, 2009

In all seriousness, if you grossly mismanage a company it is a civil, if not criminal, offense. It was certainly understood when we bailed out a corporation that no bonuses were in order. All these persons should now be fired and we should take over the company. This is what happens when you give welfare without conditions. Oh, and the knee-jerk politicians should bear a large part of the blame.

We need to get a grip here, that the poor and the rich aren't that far apart, but the rich have no excuse for their crimes and flaws. Both feel entitled.

One solution: A tax law--any bonuses that were offered at companies that recieved bailouts are taxed at 90%. Or we simply deem the management GROSSLY incompetent and take over the company.

And our politicians were grossly incompetent.

When will we realize that the powerful are just like us. They simply have more money and power. Sometimes they are due it, and sometimes they aren't.

Apparently they were contractually due the bonuses. Which is odd....DUE a bonus...CONTRACTUALLY? BONUS?

We didn't look before we leapt.

Here's a WSJ video of interest:

Links:

• http://online.wsj.com/video/why-aig-execs-are-getting-bonuses/CB02EFC6-DDC0...

posted March 16, 2009

The systems of bonuses in place at AIG obviously fostered unethical conduct, and continue to do so. There is an aura of entitlement and "specialness" that permeates the upper echelons of our financial industries. The art of selling things is important to commerce, and bonuses can be useful in motivating people.

However, the fields of sales, financial markets, corporate CEO's and "motivation" long ago moved into the world of "high rollers" and "superstars" as if what they were doing was more important than the efforts of those who actually worked hard and produced, or managed people and processes that produce, goods.

Physical work has been disrespected to such an extent in our culture that we no longer question whether someone who sells derivatives is being a productive member of society. If packaging financial papers and selling credit default swaps is more meaningful than the work of someone sweeping the floor in a bakery - then we've all gone off the deep end. No wonder the idiot savant economists, Free lunch/free market zealots and speculators have run our economy into the ground. They have undermined our capitalist system far more than communism ever could.

posted March 16, 2009

There are three problems with bonuses:

1. Anybody who is fundamentally unethical will find a way to be unethical, even if you put up barriers in front of them. Bonuses are a strong enough incentive that unethical people will find a way to earn them by doing what comes naturally, being unethical.

2. Any incentive structure will have unexpected effects. The stereotypical example within the software development arena is the bonus offered to the employees who wrote the most lines of code. Programmers who had written functions that took just a few lines of code wrote long functions instead, to get the bonus. That's not unethical -- long and short can be equally efficient and effective in code-writing -- but it was gaming the system. There's no incentive system complete enough that it won't ever inspire some behavior other than what it was designed to inspire.

3. Bonuses may not inspire the best employees (see link). If many employees aren't actually inspired by bonuses, you'll probably find the worst employees showing bonus-seeking behavior.

As for AIG, I think we're seeing a different problem here. For many in the financial sector, bonuses had become so reliable that compensation = salary + bonus. So many financial services firms are paying bonuses even now because they know their employees will be shocked to see compensation = salary. Many employees -- especially the best ones -- would not have taken the jobs at only the salary, and would regret their choices. I think all of the people in the financial sector can feel that level of regret very strongly and very personally. Thus, they make the decision to pay bonuses. I don't think it's a specific effort to game the system; I think it's a reflexive, fear-based, emotional response.

I'm interested in your story about the loan. I had a similar experience a number of years ago, although in my case it ended up being for a very small amount of money. I had actually assumed that the substantive change in the contract, inserted without informing me of it, constituted fraud. What ever happened with your loan?

Links:

• http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jht...

posted March 16, 2009

Hello,

Interesting subjects. I am of the thinking that the complete 'compensation' package should re-formulated. But because of laws passed under Clinton, all wages above $1mln are heavily taxed therefore companies have found ways to go around this by offering stock options, incentives and much more.

So, do bonuses push an individual to sell products without the client's best interest in mind? Surely.

More sales=more money=more fraud=less ethic

As an Investment Manager in Switzerland, I would receive a comfortable salary and a bonus depending on performance, attitude and more.

Because my salary was already good, I was not stressed into selling a product but making recommendations. When you believe in your products and/or recommendations, it is not difficult to make sense in front of the client without pushing. My interest is my client success. If the client is not happy with my services, he/she will go somewhere else and my employer will loose credibility and money. I will lose credibility too and maybe will be demoted or lose part of my salary.

I am for companies to pay a real salary and reduce bonuses to adequate levels and rewards through promotions, salary increases, more responsibilities. I like to earn money but I even prefer to have a good work environment and more responsibilities.

Sincerely,

posted March 17, 2009

I think it depends how the bonus is sold. I have seen behaviour change in many levels of employee who are trying to reach targets. Some simple reporting targets, some large targets that effect P&L sheets or personal income.

I wouldn't say that the changes in behaviour were unethical but often they cause more issues than they solved, even if that one target was reached. After all, we live in a world where most everything we do is connected with something else.

I like Richard's response; companies should pay a real salary. Bonuses can then be used in a balanced reward system along with promotions, salary increases, more responsibilities etc.

posted March 20, 2009