Kneejerk reactions aren’t always the best

The American public/politicians swelled with outrage at the reports of AIG paying bonuses recently. Puffed up with anger, Congress decided to implement ad hoc measures to eliminate the bonuses. Was it a good idea? Well, in retrospect it seems ill-informed and badly judged, as Megan McArdle details:

[T]he people who actually lost the money have, from most accounts, either been sacked, or left on their own. The people who got the bonuses were not involved with the dangerous trades, other than to help wind them down. …

Also, apparently, these payments were neither retention bonuses in the conventional sense, nor performance bonuses. They were guaranteed payments used to persuade employees from other parts of the Financial Products division to stay and wind down the FP’s books.

Ooops! But I think there’s a greater harm here than the injustice done to those employees, who’ve been robbed of their compensation for a year’s work. AIG had to pay these employees more to stop them from going elsewhere. Essentially, the opportunity cost of their job at AIG rose and their compensation had to rise accordingly for them to stay. The company agreed to pay the extra because it needed them, and now the compensation isn’t being paid. If I described this in other circumstances you’d think they should sue for specific performance and extract their money from the company. The sanctity of contracts, and the ability to precommit to actions, is a cornerstone of our economic success and an important part of the rule of law.

The state is meant to enforce and uphold the rule of law, yet here it is the one abrogating it. Obviously there were unusual circumstances, but it is a dangerous precedent to set. The government has essentially said that it is willing to break contracts on the back of populist outrage. If I were offered a job in the public eye in the US at the moment I’d be very worried!

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