AIG Bonuses: Negotiation Done Badly

Hearing the displeasure among politicians over AIG's plans for millions in executive bonuses was easy this last week. But much of the finger pointing and blame were off base. The problem was not with AIG management. Rather, it was with federal officials who repeatedly flubbed basic negotiation principles when previously talking with the insolvent insurer:

1. Before you get into negotiation, you must understand the value proposition - what you have, what the other party has, what value each offers to the other, and what value each needs. Either federal officials clearly didn't do the basic research into the other's position, or they wanted to ignore what would have been obvious to financially savvy types like Paulson. An obvious question should have been raised concerning AIG's contractual obligations, particularly in the area of compensation. Instead, they blundered ahead.
   
2. The feds put off the tough decisions. Negotiation isn't always pleasant and relaxing, but you minimize the problems. One of the ways is to consider what might happen during the negotiation process and then plan accordingly and stick to your plan. It's much easier to make hard decisions before the conditions demand it. That way you aren't facing the waves of emotion that can accompany undesirable circumstances. In part this is a natural result of skipping the basic research. But it also indicates that officials were operating on wishful thinking - perhaps the biggest blunder you can make in a negotiation.
   
3. Federal officials let themselves be so driven by fear of what would happen should AIG fail that they created a mental and emotional scenario in which they allowed themselves no alternative (often known as the best alternative to a negotiated agreement, or BATNA). Notice that I say allowed themselves. This was a condition of their own manufacture. Certainly they had concern over the potential of a boulder being dropped into the world's financial gears. But was that really the only other possibility? What if officials had demanded that the most important aspects of the business be sold to competitors with federal guarantees, much as happened with Bear Stearns? What if Congress had created a specialized equivalent of the FDIC to help calm market turmoil? Then the money would not have been turned over directly to AIG and management would have had to make due. The important point is not what specific alternatives they could have found, but that there were almost certainly other choices.
   
4. Officials looked at the negotiations out of the context of the circumstances. Any experienced negotiator should have known that AIG was in one of those situations where weakness actually becomes a mighty strength because the party has nothing to lose. What were officials going to do, fire the AIG execs? No one else in the industry who could do the necessary tasks would want to work there, and, more importantly, the government has no immediate and direct power over AIG management. Yes, the government is the majority stockholder, but taking any action would mean enough time to call a special stockholder meeting and the proxy process, which would take months after the bonus checks were cashed.

Ironically, although not being done particularly smoothly, the one thing that officials are doing correctly is remembering that a negotiation is never over until after the smoke clears. If you do work for someone under contract and the company then stretches out payment far beyond what the agreement called for, that company is renegotiating. It just made its move after you were committed. AIG is as saddled with the federal government as the government is with AIG. What the government needs to do now is head back to the negotiation table and hammer out more of the details ... and remember next time that it's far better to put protections and alternatives into place in the beginning than trying to find a way to force them in after.

Image courtesy of morgueFile.com user woodsy.