Oswald Letter

An Executive’s Thoughts on Executive Pay

Imagine for a moment that you own a company. Unfortunately, your company, like many companies recently, has experienced some problems that have put its mere survival in question. You’ve taken action, removed the employees who were responsible for creating most of the problems, and even brought in a new senior executive — a seasoned industry veteran with a successful track record — who you think can help clean up the mess and put your company back on the path to success.

Your new CEO has even agreed to work without salary for the first year or more, until you get the company back on its feet. If he succeeds, you promise to give him a small ownership stake in the enterprise. He’s made some progress, but the company is not out of the woods yet as he continues to unwind the issues created by his predecessors and attempts to overcome some of the obligations he has been saddled with.

The employees who remain are incredibly loyal. Many have taken pay cuts as they struggle to bring the company back to health. It seems like with everyone pulling together, you might just make it!

By the way, all of this is true. You do own this company. As a U.S. taxpayer, you are an owner of AIG.  When Congress decided to bail out the company to the tune of $180 billion, you became an owner. Shortly AFTER the bailout funds were provided, Edward Libby was brought in as CEO. Libby, who agreed to work for an annual salary of $1, was a seasoned industry veteran who had run Allstate for a time.

Libby went to work cleaning up the mess that was AIG. Most of the employees who created the problems were long gone. Left behind was a group of employees, many of whom were working at lower salaries, and trying to create enough value so that the American taxpayers (YOU!) could get paid back.

Before Libby joined the company, employees were promised that if they stayed, passing up other jobs at companies with more promising prospects, they would be compensated with a bonus. Again, the new CEO did not commit to these bonuses; they were contracts that were in place before his arrival. And, some of the employees who were promised a bonus were working without salary.

But when the bonuses were paid, the American people cried “FOUL!” The public outrage got the attention of the politicians in Washington, and the pols reacted. They called the CEO to Washington for a public hearing. They were outraged. How dare he pay these bonuses? The politicians wanted the CEO to demand the bonuses be repaid. If not, they might just tax the payments at a rate of 90% — effectively taking them away. Congress also suggested that the employees’ names should be made public so that those receiving the bonuses could be subjected to public ridicule. Something had to be done!

Herein lies my issue with all of this. You have a CEO who inherited this mess being subjected to a public flogging by grandstanding congressmen. A CEO, who has agreed to work for a salary of $1, in what really amounts to an act of civic duty. Sure, he’s made plenty of money in the past and can likely afford to work without salary, but he certainly could be making more money working elsewhere.

Despite this selfless act, he and his family have been subjected to death threats by ill-informed people who don’t realize that he didn’t create the mess, he inherited it. Then when he pays bonuses that he was contractually obligated to pay, he is summarily and publicly criticized by a group of politicians who have decided that the politically expedient thing to do is to flog the CEO.

Then, as far as I’m concerned, the CEO steps in it. While he’s in front of the congressional inquiry, he agrees with the politicians. He says that the bonuses were “distasteful” and that he has asked that the employees return half of their bonuses. Now the employees whom he needs to fix the mess feel betrayed. They’re not the ones who created the problem; they’re the ones who agreed to clean it up. In exchange for staying on what very well might be a sinking ship, they were promised a retention bonus. Now that the bonuses are paid, the CEO states publicly that they were a bad idea and should, at least in part, be returned.

The result? He lost the troops. In a very public resignation that appeared in the op-ed page of the New York Times, Jake DeSantis, an 11-year veteran of AIG, offered Mr. Liddy his resignation, and what he wrote probably represented the thoughts and feelings of an untold number of AIG employees.

DeSantis had heard enough. Not only was the public criticism and political firestorm a lot to handle, now his own CEO did not show the courage of his convictions when confronted by Congress’ criticism.  DeSantis, like Liddy, was working for a salary of $1. He had no involvement in the credit default swap transactions that were at the root of AIG’s problems, yet he had agreed to stay on to help repair the company out of a “sense of duty to the company and to the public officials who have come to its aid.”  But in his resignation DeSantis continued, “Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from family for the benefit of those who have let me down.”

This is why politicians shouldn’t try to run companies. There was a lot more to the story than what many people realized. And instead of taking the time to understand the issues and educate the public, Congress rode the wave of public sentiment, and it may lead to the undoing of AIG. They put your and my investment in AIG at risk.

One senior executive has already quit, feeling betrayed by his CEO and underappreciated by Congress. Sure, you can say that we don’t need him to fix AIG, but if he feels let down enough to walk away,  others likely feel the same and will also leave. What if other employees who have agreed o clean up the company now begin to flee the sinking ship? Suddenly those willing and qualified to potentially turn the company around and preserve our investment are gone.

If I had been Edward Libby testifying in front of Congress and being criticized for honoring a contract made by my predecessors, while my life and that of my family was being threatened and I was being paid a salary of $1, I would have handed them the key to the kingdom and resigned on the spot. Is there a place for government in business? Certainly. Congress needs to pass the laws and regulations that govern the way industries and companies operate, but it doesn’t need to be making decisions about operating activities of individual businesses. It isn’t qualified to do so.

Next post I’ll share my thoughts on the Obama administration’s role in forcing the resignation of GM’s CEO Rick Wagoner.

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