ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, March 31, 2009

AIG Bonuses: Enter Force Majeure -- Stage Left

While lots of folks are scrambling around looking for contract-law defenses to retention payments such as those given employees at failed AIG, Congress is looking at resolving the issue by introducing a new player: force majeure.  The Pay for Performance Act of 2009 would amend the Emergency Economic Stabilization Act of 2008 (which authorized the Troubled Assets Relief Program), to retroactively ban payments of non-performance-related bonuses and "excessive cmpensation" for firms that receive TARP payments.  The rules govern not just executives, but all employees at such firms.  Here's the key language:

PROHIBITION:  No financial institution that has received or receives a capital investment under [TARP] or with respect to the Federal National Mortgage Association, the Federal Home Loan Montage Corporation, or a Federal home loan bank . . . , may, while that capital investment remains outstanding, make a compensation payment to any executive or employee under any pre-existing compensation arrangement, or enter into a new compensation payment arrangement, if such compensation payment or compensation payment arrangement--

(A) provides for compensation that is unreasonable or excessive, as defined in standards established by the Secretary in accordance with paragraph (2); or

(B) includes any bonus, retention payment, or other supplemental payment that is not directly based on performance-based measures set forth in standards established by the Secretary in accordance with paragraph (2).

The law directs the Treasury Secretary to develop standards for deciding whether compensation is excessive and to set up guidelines for what types of performance bonuses are reasonable.

That will take some help.  Treasury is looking for data and mapping analyists, financial analysts, financial economists, and risk analyists.  Pay goes as high as $133,000.  Details here.

[Frank Snyder]

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I would've loved to see this language in the original act... but now that the act has already been signed into law... and businesses have taken advantage of it, don't we really now have ex post facto problems?

Posted by: Jeff | Mar 31, 2009 1:09:06 PM

I still think most people are looking at the wrong law. The employees were agents of their employer. They had to have breached their contract by acting outside their authority. After all, who gives employees the right to "bet the company." They can be sued for acting out side of their authority and for all the damages resulting from those actions.

Gavin Craig

Posted by: Gavin Craig | Apr 2, 2009 3:02:47 PM

There's no evidence they acted "outside their authority" under agency law. The fact that a decision turns out disastrously doesn't mean that the employees didn't have the authority to make it, or weren't doing their duty. They can be fired for incompetence, of course, but you sitll have to pay them all the compensation they've earned to the point that you fire them. Here, AIG not only didn't fire them, it promised to pay them if they stayed. Under that situation, they have a right to be paid unless one of the traditional exceptions to performing on a contract applies. There's no "we don't have to pay you because the public is outraged and the government (without asking us) subsequenmtly bought a big stake in the company" exception.

Posted by: Frank | Apr 3, 2009 9:09:52 AM

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