Saturday, March 21, 2009
The New York Times' Charles M. Blow has an amusingly minimal graphic, comparing the size of the A.I.G. bailout to the that of the bonuses driving everyone nuts. If the A.I.G. bailout is the sun, the bonuses are Jupiter, or something like that. The question is, why are we more worked up about the bonus millions than the bailout billions? A recent Gallup poll said 59 percent of Americans were outraged over the bonuses. A.I.G. execs have hired security, apparently with reason. ("All the executives and their families should be executed with piano wire — my greatest hope" ran one e-mail note to A.I.G.)
There is something about that word "bonus." A.I.G. execs are, to be sure, drawing large salaries, and large salaries are also supposed to be a reward for the kind of superior performance that generally makes it unnecessary for the government to bail out a company. But big salaries haven't inspired the same level of emotion.
Consider a telephone survey conduced by Daniel Kahneman, Jack Knetsch, and Richard Thaler in the mid 1980s. They asked a nationwide sample of Canadians to rate the fairness of this scenario:
A small company employs several people. The workers have been receiving a 10 percent annual bonus each year and their total incomes have been about average for the community. In recent months, business for the company has not increased as it had before. The owners eliminate the workers' bonus for the year.
An overwhelming majority (80 percent) found this an acceptable business practice. Only 20 percent thought it "unfair." The researchers also tested this alternate scenario on a different random group:
A small company employs several people. The workers' incomes have been about average for the community. In recent months, business for the company has not increased as it had before. The owners reduce the workers' wages by 10 percent for the next year.
This time, most people (61 percent) judged this unfair. But of course all that's really changed is words. In both scenarios, the workers are essentially getting a ten percent pay cut. Those surveyed thought that was acceptable if and only if the foregone pay was labelled a "bonus."
The financial services industry had long used this trick. Profits are volatile. Rather than cut "salaries" in bad years, they cut "bonuses" (which account for much or most of the compensation overall). This makes pay cuts easier to swallow. The verbal legerdemain has now come back to haunt A.I.G. They are finding that the public is far more upset at a multi-million-dollar "bonus" than a multi-million-dollar "salary." Words matter, even for people who ought to know better.