Retention bonuses infuriate, but they're not uncommon

At a time when 8.1 per cent of Americans are unemployed and Canadians suffer with a 7.7 per cent jobless rate, the idea of paying a bonus to people to remainat work seems preposterous.

Yet, American International Group paid about 400 employees in its financial products unit about $165 million US just to stick around.

On Friday, courts in Ontario and Delaware gave Nortel Networks permission to pay as much as $7.3 million US in retention bonuses to eight senior executives.

The payments are part of a bigger $23-million US incentive program covering 92 staff at the telecommunications company.

The so-called retention bonuses enraged many American taxpayers and their Washington representatives because AIG accepted $182 billion in government bailouts.

The Nortel paymentsenraged many laid-off employees who were denied severance pay after the company went into creditor protection in January.

'Retention bonuses have a place because they serve a legitimate corporate purpose. ' Connie Reeve,Blakes law firm

But while there's plenty of anger to go around, retention bonuses are not that uncommon and usually not controversial.

"Typically, retention bonuses are put in place when a company is going through significant change," said Lisa Slipp, the leader of the executive remuneration practice atMercer,a human resources consulting firm in Toronto. "It could be a period of crisis, or a merger and acquisition, or reorganization. But they're typically related to a period of significant change where the company feels it needs to retain certain employees until the crisis is passed."

AIG meets the crisis test, all right.

Connie Reeve, a partner in the labour and employment group with the Canadian law firm Blakes, said retention bonuses are a well-established practice to keep companies whole when they go through a transition.

"As you can imagine, in businesses where the intellectual capital is the essence of the business, losing your best and brightest because people fear what is going to happen in the future is a bad thing," she said. "Retention bonuses have a place because they serve a legitimate corporate purpose."

While there's plenty to quibble about over the size of the bonuses, AIG's new CEO did try to explain to U.S. lawmakers on Wednesday how important these incentives are.

Edward Liddy said the bonuses were offered to executives in the financial products section, where risky investments ultimately became the company's undoing. He said each executive was offered money to dispose of their "business book," meaning the transactions they were in charge of handling.

The company's financial derivatives had already been reduced from $2.7 trillion to $1.6 trillion, and AIG felt there was the risk of further financial catastrophe if the remaining $1.6 trillion were not disposed of properly. So, the company felt it was worth paying to retain the executives who knew the business best.

"I know $165 million is a very large number," Liddy said. "It's a very large number. In the context of $1.6 trillion, we thought it was a good trade."

'This is like the captain and the crew of a ship reserving the lifeboats.' Stephen Lynch,Democratic representative fromMassachusetts.

AIG has hardly set a high standard of corporate canniness. While receiving federal bailout money, it spentabout $440,000 on a retreat for executives at an exclusive resort in California. Still, Liddy said he was not at the firm when the contracts were signed, and that if he had been, he would not have approved them.

Retention bonuses not tied to performance

Representative Stephen Lynch, a Massachusetts Democrat, angrily denounced the contracts.

"This is like the captain and the crew of a ship reserving the lifeboats," he said.

Slipp declined to speak about AIG directly.She did say that retention bonuses, while common in Canada, tend to be smaller than in the U.S. and that it can be complex to determine their value.

"The longer the retention period, the higher the amount is likely to be," she said. "A typical retention period isthree months to a year. One rule of thumb is that if an employee is bonus-eligible, the retention bonus would be somewhatsmaller than an incentive bonus.

"Retention bonuses are not typically tied to performance but to a period of time. But [the value] has got to be meaningful enough that they'll feel it if they walk away from it."

The idea of a retention bonus really rankles some of Nortel's creditors.Lawyers were reassured, however, that the incentives were tied to performance.

"Our clients take no objection so long as there is no incentive plan that rewards employees for simply staying with the company or that gives them an incentive to reduce benefits for former employees and retirees," said Mark Zigler, a lawyer at the Koskie Minsky law firm in Toronto, which represents former employees of Nortel.

Slipp says in her company's view, retention benefits "should not be for a top executive. Dealing with crisis and change is part of their job."

AIG CEO Liddy said he has asked employees who received retention payments in excess of $100,000 to return at least half of those payments. Some have "already stepped forward and returned 100 per cent," he said.

Perhaps after the voluntary paybacks and the tax clawbacks, the retention bonuses will no longer be a source of such controversy, and the U.S. president won't have to make good on a promiseto seeklegal recourse.

And that could be just as well.

Reeve also declined to speak directly about the AIG bonuses.

"[But] from a Canadian standpoint, if a company had contractually agreed to provide these bonuses and an employee met the conditions? In Canada, that would be a binding contract," she said.