What would you do if you were employed on particular terms ($1 salary plus a performance bonus) and later asked to forego your pay? Would it make any difference if you worked in a company that had to be bailed out by the government?
The payment of bonuses to AIG executives has received much publicity. So it was very interesting to read the public letter from Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.: Dear AIG: I Quit!
The misalignment of compensation and its effect on corporate ethics and compliance is the subject of an article (Risky Business) on the events at Countrywide Financial Corporation, one of the largest US Sub-prime lenders.
The CEO's pay package. Mozilo took home more than $140 million in 2005 and more than $100 million in 2006 even as the share price started to tank, according to a Corporate Library report. It wasn't only that he was among the most highly paid executives in its surveys. He also was guaranteed both a pay raise each year and a hefty stock option grant. Where his compensation was tied to performance, it wasn't the long-term sort that governance consultants recommend; his bonus was calculated in part by the rise in the stock price from the previous year…
Managers' bonuses were based on revenue, and in recent years Countrywide's big revenue producer was subprime mortgages. So they had a special incentive to favor that market. Loan officers did, too, because they were paid larger commissions for pushing these loans.
Why were they especially lucrative? Borrowers were charged higher rates for them than for prime mortgages because the loans were riskier. And Countrywide, based in Calabasas, California, sold these loans for a nice profit to investment banks like Merrill, which in turn bundled and sold them as CDOs. Between 2004 and 2007, Countrywide originated $150 billion in subprime mortgages-the most in the industry-helping vault it into the Fortune 100.
It's clear that ethics and compliance will suffer if performance bonuses are linked to the wrong KPI's.
