BUD BREWER
One Man's Opinion
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March 16th, 2009 |
one response March 16,2009: The Sunday network news and cable talk shows reported over the weekend that American Insurance Group (AIG) announced that they had paid executive bonuses of over One Hundred and Fifty Million dollars to certain executives and a British Corporation under operational contractual agreements in place for the last year. This news on top of what has appeared as “greedy” executive salaries and bonuses by Wall Street banks has the average taxpayer outraged. The government has given over One Hundred and Eighty Billion ”Bailout” Dollars ($180,000,000,000) to AIG, effectively taking over more than 90% equity ownership of the company. They have done this with taxpayer money and then to allow the company to pay bonuses to executives or other agents who have been a party to bringing this company to its knees financially has almost everyone in this country simply infuriated. After all, these dollars were intended to keep the company operating and not to pay out in the form of bonuses. Bonuses for what? Breaking the company?
I must say that I felt the same disgust when I heard the news about this transaction. But then I started thinking about what was actually happening. If the so called bonus was a year end settlement of compensation agreements that called for a receipient to earn a percentage of the revenue they generated through their clientle, then in fact if the basis for them earning the settlement payment (bonus) was achieved, they should be paid what is due them if the company is to be an ongoing entity. It is a fact that in every enterprise, big or small, there are individuals who we call “rainmakers”. They are the people who bring major portions of revenue to a company’s top line. They are key people or organizations of people, upon whom the company depends for the flow of revenue in compensation for its products or services. When I was a Branch Manager in the brokerage business back in 1963-68, there was one individual working for me who was my principal rainmaker. He brought in 20-30% or more of the branch’s total monthly revenue, revenue that enabled me to pay the rest of the staff and overhead operating expenses and still make a profit for the firm. Under his employment agreement, he was directly compensated by receiving a variable percentage of his total revenue paid in the form of a base monthly “draw” and a net commission check (bonus) paid annually. While the draw could be and was adjusted from time to time to reflect his annual rate of “rain”, the working agreement was that he would receive the agreed percentage of revenue that the firm received each year from his clients. My branch would have been much less profitable if he decided to move to another firm since he most likely would be able to take all, if not most of, his revenue producing clients with him. I also would have been judged much less successful in my branch management role if he and his clients moved to another firm.
The American business economy works on the premis of compensating workers and executives in some proportion to their value to the firm. For most senior and junior administrative personnel, this value is determined by the manager’s judgment regarding the individual’s contribution to the firm’s profitability. This judgment requires an assumption of a certain level of revenue and then management makes an arbitrary determination of the value that each employee contributes to the firm’s service or production unit/cost ratio. In addition to this type of calculation, a year end discretionary profit sharing supplemental payment is usually paid to administrative personnel. Administrative personnel and executives’ compensation will also reflect a value dependent upon their availability in the market place and the demand for persons with their capabilities.
Corporate executives are compensated in much the same way except there is an additional factor recognizing their capital investment in the equity of the firm and the benefits realized through dividends, stock appreciation or a recognition of their participation in the risk of ownership. It is in this area that the outrage resulted on Wall Street when some financial companies paid their administrative and corporate executives non contractual, and seemingly self serving, bonuses after receiving “bail out” funds from the government, i.e. the taxpayer. Such payments justifies the outrage. The failure to distinguish a difference in the relative value present in the two different forms of “bonuses” may cause the Congress to pass legislation that forbids this type of compensation But instead of assuring fairness and equity, such legislation removes management judgment and flexibility and is far more likely to cause the American free market capitalistic system to become more socialized.
I am disturbed by the expressed opinions of members of our Congress and the commentary of the liberal media that clearly does not understand or appreciate the difference in the functions or benefits provided by the Rainmaker and the Expense Administrator in our economy. Rather than complain about Rainmaker’s bonuses, these people should join me in being more disturbed regarding the difference between the real value of the members of Congress ( Maxine Waters (CA) comes to mind) and the questionable administrative productivity they bring to the expenditure of our tax revenue. Since professional politicians can hardly be classified as Rainmakers (except perhaps temporarily for authoring legislation that raises tax rates), how should they be judged to determine fair value for their services? While complex, I believe that in addition to their administrative effectiveness in doing their job, they should be judged by the voter in terms of how much legislation they sponsored or co-sponsored that contributed to the growth of the Gross Domestic Product. Furthermore, since studies have shown that given any average tax rate, total tax revenues are approximately 19% of GDP, the growth in gross tax revenues will depend almost entirely upon the growth in the GDP itself. Therefore it seems appropriate that during their term of office, they should be compensated by the payment of a monthly draw against an annual compensation rate (bonus) equal to a percentage of the net fixed amount budgeted to run their office that is remaining after deducting all administrative expenses of that office plus or minus a factor for Federal budget surpluses or budget deficits. Since such a compensation methodology would incentivize efficiency and increased productivity, Federal tax rates could be more modest and the country’s GDP would grow faster thus generating more gross tax revenue. With the incorporation of this compensation method, our Congress people effectively might even become classified as “Nouveau-Rainmakers”.
One Man’s Opinion –Bud Brewer
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Hey Bud,
Gary sent this to me and I agree with your comments. This is outrageous and I look forward to more blogging.
Erik Odeen