Thursday, March 19, 2009

An ex ante vs.ex post post

The AIG bonus controversy is interesting, not so much for the predictable back and forth between those few who are lining up in favor of them (see Ruth Marcus of the Washington Post for the basic argument, one that is shared by the editorial staff of the Chicago Tribune) and those who are outraged that a company that got itself into so much trouble that the federal government would have to buy 80% of it would pay massive sums to the people who ostensibly caused that trouble.

What it does show is a dichotomy in the way two groups of people look at the world. The common concept of a bonus is that it is something paid ex post, that is, it's earned for work that has been done. Someone has a good year, produces a lot for their company, and they're rewarded with some extra compensation. The baseball player has a good first half, is named to the All Star team, and there's something extra in the paycheck. We all get that idea.

But there is another group of people who hand out (and collect) money for what they hope will happen, ex ante payments. To them, a bonus is not a reward for a job well done, but a sweetener to induce the recipient to do the good job. Under this theory, the financial analyst who would go home early if he's only making $150K will keep his nose to the grindstone for $300K. (Note that I'm not ignoring the argument that the analyst has to be paid or he'll go elsewhere, but, if that's all we were trying to accomplish, we'd just pay him $300K in the first place, not structure it as a "bonus.")

Most CEOs tend to favor the latter interpretation, even for themselves. This creates some odd situations, as when huge "incentive" payments are given to people who are leaving the company (11 of the AIG bonus millionaires have already left the company; for another example, see Bob Nardelli and Home Depot).

Philosophically, the ex post interpretation is consistent, and people feel it's consistent. Bonuses are a reward for exceptional performance and nothing else.

Ex ante, however, requires the believer to jump through mental hoops. You see, there are no companies in which every employee gets pre-agreed bonuses. A CEO puts one group of people in one category, the rest in another. And they don't even see the inconsistency of handing out speculative bonuses to one set of employees, while insisting that bonuses to the other, larger, group result from a lengthy (and imperfect) evaluation process.

Of course, the discerning reader is thinking. The CEO believes that the first set is valuable, integral to the success of the enterprise, while the second set is derived from a vast fungible supply of workers who can easily be replaced. That's not what they say, but it's certainly how they feel. So, perhaps, this post is belaboring the obvious, that "Our power is our people" is just a meaningless group of words that these captains of industry mouth whenever they want to seem like men and women of the people.

But there is still value in pointing out yet another way in which American companies do not exist to employ Americans or compensate Americans, and our insistence on acting in this way is a profound problem. We save one group of auto companies with operations and employees in this country in preference to another group of auto companies with operations and employees in this country, based solely on where their ultimate corporate headquarters is located, then we're surprised when a large part of the strategy involves the firing of American workers.

And this is why any attempt to save American jobs by funneling the money to corporations is problematic. Any such result is collateral, no matter what the corporate leaders might say. We have no proof that the money will be used to beef up domestic payrolls. Unfortunately, short of starting up another CCC, I can't imagine a better solution, so we'll probably be stuck using this indirect method of trying to bring down the unemployment rate; we simply shouldn't assume that the most rosy predictions will come true.

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