Articles

Marshall Law

Retention bonuses are part of old tradition

By Marshall H. Tanick

The term “retention bonus” has become a naughty phrase after the $165 million paid out to employees of American International Group (AIG), some of which is being recaptured in the wake of the public furor created by the payments as part of the Federal bailout of the insurance giant.

But the largesse to personnel in money-losing units of AIG is not the whole story. Other bailout recipients have been paid large bonuses, too. As the AIG furor slackened, the New York Times reported that nearly 20 bailed-out financial institutions are poised to give out bonuses worth more than $50 million to about 75 executives. Then, Fannie Mae and Freddy Mac, the two troubled mortgage guarantors of more than half of the country's mortgages, announced it was distributing $210 million in “retention” bonuses. They were to be spread out among 7,600 employees, with more than 200 receiving payments in excess of $100,000, topped off by $2.3 million to one top executive.

With few exceptions, these “bailout boys” (interestingly, nearly all of the players are men) remain unrepentant in obtaining large payments for agreeing to continue performing services for their faltering companies. One reason for their insouciance is that retention bonuses, or variations of them, have a long and treasured place in the American economy.

These venerable devices were commonplace well before the bailouts began. They often were disseminated under varying rubrics in connection with acquisitions or mergers of business entities. Sometimes referred to as “stay put” payments, a term that suggests a teacher displincing an unruly pupil, the arrangements were concocted so that key personnel in a company being integrated into another outfit would be paid a certain amount of compensation, usually money and sometimes stock, to remain with the new amalgamation during the transitionary period.

The forerunners of retention bonuses, the payments generally are tied to a specific period of continued employment, often coupled with a post-employment non-compete restrictions. The arrangements are aimed at providing incentive for crucial personnel to stay with a company about to be absorbed and guide it through the post-acquisition or merger turbulence. Companies acquiring other entities often insist on these provisions in their transactions, sometimes naming the key people that they wanted to keep on with these devices.

A similar, but more controversial device, is a “golden parachute.” These types of arrangements, created by management to protect themselves in the event of a acquisition or merger, assured that the execs would be given a large pay-off, sometimes one or two years of their salary and benefits, in the event their company is taken over. These mechanisms were motivated, in part, by a desire to deter outside acquisition. But they often served as a means of easing executives into their post-corporate afterlife.

These arrangements were a realistic means of assuring continuity in the workforce, rather than rapacious efforts to indulge at the taxpayers’ tough. The bailout recipients, like AIG and others, have drawn upon this long history in devising and implementing their retention bonus policies.

No one cared too much about these arrangements as long as they were funded by money in the private sector, coming from shareholders. But, when the payments come from the taxpayers, as in the recent bailouts, the ire is inevitable and the thirst for recoupment insatiable.

The bail-out beneficiaries insist that these payments are justifiable and necessary to keep top talent and plan to continue to provide them. But, as the AIG implosion illustrates, today’s troubled economy presents a whole new ball game for bailout beneficiaries, and the rules of the game could dissuade those executives from benefiting from these bonanzas.