Friday, March 20, 2009

Why Confiscating the Bonuses is Fair

The 90% tax on bonuses paid out by companies that are on life support due to government intervention is imminently fair.

But once again, special interest groups are trying to convince legislators that the tax is unfair, and sets a bad precedent, and everyone would understand why this is bad policy if only Congress really understood "the way business works."

Well, the way business should work is that businesspeople should figure out how to build sustainable businesses and should get rid of any incentive schemes that encourage people to work against the long-term best interests of the company.

Early in my career, I benefitted from stock options that were paid out over a multi-year period. The value of the stock was directly tied to how well the company was doing overall. It really dawned on me how effective this compensation system was when an employee sent email to his work friends boasting about how much he'd spent on a business dinner the previous evening. People were aghast, and the mail got forwarded around. A common theme was "How dare you boast about spending OUR money?" Everyone in the company who had stock options felt like they were owners of the company. That affected everything, including hiring decisions. After all, it's a lot different if you're hiring people with someone else's money; when it's your money, and you're going to be sharing it (the net effect of hiring people who also get stock options), you tend to be more thoughtful.

Since I frequently managed multi-million dollar budgets and hired agencies at that company, I was often "courted" with gifts - things like courtside seats to pro sports games. Only once did I take tickets - for a set of great seats to a Rolling Stones concert. That experience made me uncomfortable because, although I convinced myself I would never make a business decision based on such gifts, I could see how easy it would be to become seduced by such experiences. (The irony was that everyone around me with great seats to that concert looked like a corporate type - and though the Rolling Stones did a great job, the crowd experience felt completely sanitized and somehow unfulfilling.)

After that, I accepted only the occasional Christmas basket, which I always shared with everyone on the floor. Later, the company adopted an official policy, essentially banning gifts of any value.

The ban on gifts was put into place to keep employees from making decisions that worked against the best interests of the company. If you're hiring an ad agency or PR firm, you should be hiring them because they can do the best job for the company, not because you control the type of purse strings that tend to attact lavish gifts.

Later, when I joined my husband to build a startup, we decided upfront that we needed for everyone to feel like owners. So while the founding partners put up the upfront cash and took the earliest risks, employees who joined later earned a piece of the company. And when my husband and I later sold our interest, we sold a good chunk of it back to the company over a multi-year period, knowing that we were only going to get paid if the company continued to do well.

So when I hear about employees at AIG and Merrill Lynch getting huge bonuses just before or even after their companies are getting huge bailouts from the government, my blood boils. As a taxpayer, that's MY money. And I don't care what type of business you're in or whether your part of the business made money and did all the right things but your colleagues down the hall or in a completely separate part of the world made all the bad decisions, YOU WORKED FOR THE SAME COMPANY AND THE COMPANY FAILED. And the fact that you and your bosses can't seem to fathom that because the company failed, you shouldn't be paid ANY bonus is just beyond comprehension. When a company fails, no bonuses should be paid. And since you people can't seem to figure that out, Congress must step in.

I know how business works. I'm comfortable that I'm not missing key facts on how compensation should be structured. Members of Congress shouldn't be distracted or deluded by so-called experts who say that taxing these bonuses is somehow bad policy. It's atrocious policy, but because the underlying acts are even more atrocious, it needs to be done.

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