MNGT 416 Case #1.doex Case Study CONTROVERSIAL RETENTION BONUSES AT AIG American
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MNGT 416 Case #1.doex Case Study CONTROVERSIAL RETENTION BONUSES AT AIG American International Group (AIG), a behemoth insurance and financial services company, became notoriously famous in early 2009 for the payment of S165 million in retention bonuses to employees in its Financial Products unit. This was the same unit that was instrumental in bringing AIG to its knees and necessitating the infusion of billions of dollars in U.S. government bailout money. Although the near-collapse of AIG was significantly influenced by "soured trades entered into by the company's Financial Products division," the operations of other AlG units, such as the financial gambles of its Investments unit, helped cripple the company as well. Rapidly mounting financial losses had been occurring in the Financial Products unit for some time. Consequently, AIG decided to unwind the business and shut it down. In early 2008, employees in the unit were asked to remain with the company through the shutdown and, essentially, to work themselves out of a job. To entice talented employees to stay and work, a contractual retention bonus plan was instituted. According to a report in The Washington Post, the Financial Products employees were repeatedly assured that AIG would honor these contractual obligations. The bonus plan was highly favorable to AIG's Financial Products employees, as there was no firm connection to their job performance. The unit's employees were paid bonuses totaling S423 million in 2007, despite a paper loss of S11.5 billion on toxic real estate assets. The 2008 bonus plan, which was approved in March of that year just as the unit's losses were beginning to surface, was "designed to kick in without regard to paper losses." For 2008, paper losses on the toxic real estate assets ballooned to $28.6 billion, and total losses were more than $40 billion. According to New York Attorney General Andrew Cuomo, who was threatening legal action against AIG, seventy-three Financial Products employees received S1 million or more in bonus payments. The top recipient, identified by The Wall Street Journal as Douglas Poling, received more than S6.4 million, whereas the next half-dozen top bonus recipients got more than $4 million each. In addition, another fifteen employees received S2 million or more, and fifty-one other employees received Si million or more. "Of those people collecting more than SI million, eleven have already left the company, Mr. Cuomo's office said. When the retention bonuses were paid in March 2009, the U.S. Congress, President Obama's administration, and the public were outraged. Under intense political pressure, AIG's CEO Edward Liddy, who was working for only SI a year, asked the "bonus recipients to cough up half their pay, despite fearing that resignations would follow." In defense of the bonuses, however, Gerry Pasciucco, head of the Financial Products unit, observed that the "top bonus recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility, infrastructure and energy investments. He's done an excellent job at the task of unwinding his book, of realizing value." In the ensuing emotionally charged days, employees of the Financial Products unit pondered what to do. According to one account, "employees have huddled in small groups in conference rooms off the division's main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One employee said he had instructed his wife to call the police in the event his identity became known and a news truck appeared at his home. Others commiserated that their children have been verbally abused in school. Employees have passed around emails from colleagues who opposed returning the payments.Explanation / Answer
AIG was a leader in the financial and insurance segment in America, and the controversial retention bonuses it paid to several employees in 2009 generated and outraged reaction from the Obama Goverment as well as the public at large. Large amount of bonuses given to employees in spite of the company exhibiting significant losses on toxic real estate assets. The recipient of the bonuses and varied reactions ranging from fear to guilt to righteousness and virtuosity.
1) AIG American International Group was facing financial losses within its financial products unit and the company was on the verge of bankruptcy when the American government decided to rescue it with a bailout package. In 2008 the company decided to taper down its activities by slowly shutting down some units. To prevent mass Exodus from the company leading to certain destruction the company offered retention bonuses of large amounts to certain employees to ensure they stayed with the company in spite of the impending closure, by promising to honour the bonus payments, in spite of losses being incurred. It was a means of motivating the top performers within the company to remain with the company, so as to stem to optimise output and bring the company back on track as far as possible. This financial motivation resulted in packages for the employees which Wafa about the prevalent industrial averages and serve to extract maximum performance and exceptional commitment from the employees. Since 20 employees had been working with AIG for a long period they were expected to be loyal to the company during a crisis situation and expected to steer it to safety. Employees desiring to provide valuable service to the company in times of crisis on being motivated to do so is explained by cognitive process theory of motivation.
2) Upon the extreme reaction outrage expressed by Obama's administration and the public at large with regard to the company's policy of high retention bonuses which were to be prioritised and facilitated even while the company was presenting huge losses on paper, the management of the company decided to recall 50% of the bonus amounts paid from the recipients. This exposed the company to risk from the high performing employees tendering the resignation in case they considered the decision unjust and prejudiced, and also the probability of employee is facing retaliation arey tribute reaction from groups against this announcement or violent groups within society. Most of the employees were concerned about their safety and protection of security which would be provided to them if they decided to return their bonuses. Deferred retaliation from the group of employees who receive the bonus and one willing to return the same and threatened the employees willing to return the bonuses with dire consequences to the extent of abusing the children at schools. This created a strong Fear Factor among all recipient of the bonus leading them to resort to extensive measures to keep their identity secret, ensure maximum. The other needs which were fulfilled were of displaying high ethical and moral values which resulted in greater feelings of self worth along with imparting greater value towards the organisation by supporting it in a situation of crisis.
3) individual and organisational exchange relationship may be committed or calculated on the basis of the situation that exist and the organisational structure and environment. It revolves around creation of a balance between efforts and subsequent rewards in organisations. The contributions and demands of each party are provided adequate representation within the relationship. Demands form the basis for all expectations of individuals from organisations and Vice versa. Contributions provide the basis for satisfaction of these demand expressed by both parties in the relationship in the form of skills, abilities, professional output and knowledge by employees and compensation, status and related benefits from organisations. In committed relationship both sides Iinvolved have no demand as in religious cases where as in calculated relationship each party expresses certain demands. In case of AIG the company is undergoing a crisis situation facing impending bankruptcy and dissolution and requires to retain it's high performing employees by providing adequate motivation for them to provide exceptional inputs in the form of Stellar performances. it achieves this motivation by offering to pay large sums as retention bonus to these employees.
This exchange relationship was violated due to expression of widespread outrage by the government and the public outcry against the large amounts of bonuses offered by the company while exhibiting operating losses as being unethical leading the company to cut the bonuses by half. This was perceived by some of the recipient employees as being unjust and unfair and the company reneging on its agreement to pay a certain sum for exceptional performance. This was considered to be dishonouring of an agreement leading to violation of contracted relationship.
4) Motivation is it tool for extracting and sustaining performances of behaviour from an individual directed towards successful achievement of goals. Various theories exist on successful implementation of motivational tools and processes, to direct employees towards achievement of goals. In the given case study the expectancy theory of motivation is most applicable. As there was a clear connection between the effort and performance and outcome for the same in the form of the bonus offered. All the three cognitive processes of motivation indicated by three key factors in expectancy theory of valence expectancy and instrumentality exist within the case. Valence refers to the perception of value and the importance of it for the recipient of the bonus. Expectancy by AIG and the employees, in the belief that the effort will definitely lead to performance, in the form of the desired outcome. Instrumentality being in the belief that the performance of the employees is related to rewards in the form of Bonus and cannot be achieved otherwise. Expectancy theory is based on the concept of self interest and self promotion above moral and ethical concerns which is true of the situation as the employees should have felt morally responsible to provide the best effort to a company we had worked for sincere without expectation of payment of a large bonus. That is why different culture react in different ways to motivational techniques employed by companies.
5) the amount of compensation offered as bonus by a company in curing use losses and facing bankruptcy, is definitely expressive and also exhibits desperation and improper and inefficient Management by the leadership of the company along with unethical behaviour by employees accepting such bonus while the organisation they work for is in a crisis situation and requires the unconditional support and unprecedented efforts to steer it out of the crisis. In spite of exhibiting close on paper and having to accept a bailout package from the Obama administration the company deciding to pay unexceptionally large amount of bonuses is definitely not ethical or acceptable.
6) as an employee I would first and foremost, refuse to accept such a large amount as bonus from a company which was in a crisis situation and which has provided me financial support and status with self worth for so many years of my career. As a loyal employee with ethical values I would consider it my duty to put in my best efforts and generate the maximum output for the benefit of the company to save it in a crisis situation. Therefore, I would pledge my absolute support to the organisation to the best of my abilities.
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