Saturday, July 11, 2009

The Double Edged Sword of Reward & Punishment

Under conservatorship and the beneficiary of $180 billion in taxpayer money, AIG is predicted to have negative equity. The bleak picture would normally squelch any suggestion of performance pay, but no. Top management deserves their incentive pay, despite creating pay systems that suboptimize the company. But it doesn't stop there. WaPo reported:

In March 2010, AIG is scheduled to pay more than $200 million in bonuses aimed at retaining executives at AIG Financial Products, the unit whose complex derivative contracts nearly wrecked the insurance giant last fall.

American leaders love to tamper with people's pay, repeatedly pressing the pedal on the fifth or six greatest workplace motivator. Their insistence on bribing people like rats has predictable results. When extrinsically trained employees push on the bar and no bonus checks appear, it's a shock. They feel punished. Some play payback.

What happens if AIG's derivatives traders don't get bonus money?

They could abandon the firm. Company executives have warned that a wholesale loss of expertise could endanger taxpayers' investment in AIG.

AIG Chairman Edward M. Liddy, in testimony to Congress earlier this year, warned that the deals at Financial Products could still "cause irreparable damage."

Bribes and punishment work both ways. Live by the extrinsic motivator, die by the extrinsic motivator. Note: Pay for performance is President Obama's solution for the ills of health care and education. Expect them to work as well as they did on Wall Street. There will more suboptimization at the peril of the greater system.

No comments: