The Intersection of Politics and Business

The level of shock and pain experienced by the public during the recent downturn has led to a political environment that is unwilling to defend valid business actions. The desire to find someone to punish for the downturn has led to actions that are threatening the rule of law.

The recent attempts to punish AIG and its execs as an egregious example of pay for failure, misses the point that the retention contracts (however large and misguided) are rational business practices and contractually valid methods of securing the continuing services of key staff during the wind down of a business. If these staff were not retained the likely result would have been even greater losses as the business was unwound.

The carryover political fallout has others reviewing their incentive plans and compensation designs with an eye focused primarily on the political optics rather than the business purpose. Questions are arising whether Boards' should exercise their discretion to reduce payouts that would otherwise occur based on superior relative performance.

Its always been politically difficult to payout incentives when the performance is based on mitigating losses relative to peers rather than solely on making money, but it is precisely this protection on the downside that requires the most foresight and talent. While it would certainly have been preferable in the first instance to have introduced risk mitigating incentives into plan designs, choosing to reduce or eliminate incentives that mitigate risk through retention of key staff or awards for superior relative performance leads in the wrong direction.

A further concern is that these actions create an environment in which valid contracts are not honored thereby denigrating the rule of law. The congressional passage of an after the fact tax aimed at contractually valid bonuses further subverts the basic foundations of business.