AIG Case Study
What types of work behaviors did AIG intend to encourage through its retention bonus plan?
AIG was attempting to encourage efficiency. Because of failures in its Financial Products unit, it intended to shut this area of the company down. Arguably, workers within the unit would only work in a proactive manner if they received bonuses to ‘work themselves out of a job.’ However, there was no clear relationship between performance and pay: even during the height of the toxic real estate debacle, employees were still given bonuses.
Using the model of the individual-organizational exchange relationship, explain the relationship that employees of AIG’s Financial Products unit believed they had with the company. How was this exchange relationship violated?
Employees at the company believed that if they performed the actions they were bidden to perform, they would be rewarded. Under the exchange model, workers are paid for performing work and meeting goals, not for upholding ethical ideals. However, the actions of the Financial Products unit were such that they nearly brought down the company (and much of the world economy) because of AIG’s reckless involvement in toxic assets. Even in a pure exchange relationship, the employee is assumed to bring something of value to the organization. The opponents of giving the workers in AIG’s Financial Products bonuses felt that they did not do this and merely created harm for others in the long-term to make profits in the short-term.
However, the workers alleged that they were simply doing what they had been asked to do after working long and hard to dismantle the company. One aggrieved worker pointed out that for some employees, the bonuses were their salaries. To deny workers the bonuses would thus be a denial of the most basic aspects of the employee-employer relationship. Also, other elements of the company had a role in bringing about the credit crisis as well as AIG: it was unfair to solely blame the Financial Product division.
Q3. Which motivation theory do you think has the most relevance for understanding the responses of the Financial Product employees to the implementation and unraveling of the retention bonus plan? Explain the reasoning behind your answer.
The motivational theory of path-goal theory suggests that different motivators are required depending on the desired objective of the manager. Managers can choose to be supportive, directive, participant-oriented, or achievement-oriented, depending upon the personality of the workers and the task at hand. AIG created a highly achievement-oriented environment in which being ‘the best’ became synonymous for engaging in extreme risk-taking behavior regarding company finances (Straker 2012). After zealously being encouraged to achieve certain objectives for AIG, when there was outraged about the financial fallout their actions caused, the managers still felt that they should be awarded for the ‘achievement’ of fulfilling the expectations of management. Great stress had been placed upon their excellence and talent as employees before. The public approbation was the complete antithesis of the self-image they had been encouraged to craft.
Q4. The amount of compensation earned by executives — as well as by professional athletes and famous actors/actresses and musicians — often sparks emotionally charged debate. Do you believe the $1 million plus retention bonuses received by seventy-three employees of AIG’s Financial Products was excessive? Why or why not?
Yes. Granted that for many the ‘bonus’ effectively was a ‘salary.’ But paying workers in such a high proportion of their salary as a ‘bonus’ encourages the risk-taking, quick-fix focused attitude that brought about the credit crisis. Workers feel pressured to demonstrate their worth by making big, showy deals, rather than building the company in a sound fashion slowly. “Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster” (Taleb 2011). The more risk-taking is encouraged, the more unexpected, global events such as the credit crisis will occur.
References
Straker, David. (2012). Path-goal leadership. Retrieved:
http://changingminds.org/disciplines/leadership/styles/path_goal_leadership.htm
Taleb, N. (2011). End bonuses for bankers. The New York Times. Retrieved:
http://www.nytimes.com/2011/11/08/opinion/end-bonuses-for-bankers.html?_r=0
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