Corporate incentive plans to AIG or not to AIG

June 7, 2009
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The bonuses paid to AIG executives has everyone outraged.

Perhaps we should direct a portion of our anger at some other people, as well. The issue for those getting the bonus may be a moral issue. However, the real culprits may be the people who designed the bonus plan and who approved the plan. They may be the ones who are most responsible and perhaps even negligent in their performance. 

In simple terms, if the bonus plan was designed to pay a certain amount for each transaction completed and the “traders” at AIG completed those transactions as specified, then they get the defined bonus. The proper design is to have the transactions enhance the value of the company. So in this case, it should mean a profit for the company, or there should be a value for the client or some other objective that lines up with the success of the company.

The design is critical, and the associated administration must ensure that the plan objectives are achieved before money is paid out. In any good bonus or incentive program, there needs to be a testing of the design before the plan is implemented. What happens in normal situations, in really good circumstances and when things don’t go well, all need to be considered. The people who approve the plan should be assured and knowledgeable about the consequences of participant actions, before the plan goes into effect.

It appears all these steps were not taken. Owners and parties of interest to AIG may want to look real hard at what took place with the compensation plans. The actions resulting from the plan may have been the lynch pin that brought AIG and the U.S. taxpayers into today’s situation. The traders just did what they were asked to do and re-enforced with the bonus plan — and they did it very well. So are they the culprits because they followed the money?

Incentive plans, when designed properly with appropriate controls, can accomplish a variety of goals. Basic human nature pushes people to do those things that are in their best interests. The critical element is aligning company goals and employee goals. Then make sure the outcomes are as desired for the owners, the managers, the employees and the customers under associated regulations and laws. 

All of the above is basic compensation practice and any adviser/consultant should be able to guide the decision makers through the process. The process is very straightforward: Values » Goals» Plan Objectives» Design» Testing» Implementation» Controls» Bonus.

There are a great many benefits that can come from a well-designed incentive plan. Don’t “throw out the baby with the bathwater.” Don’t let the debacle at AIG ruin a good business strategy. Let it be a learning opportunity. Look at your situation, correct any shortcomings before they are a problem or determine if you can improve your business with a well-designed incentive plan.

Ardon Schambers is a principal with P3HR Consulting and Services LLC (www.p3hrcs.com).

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