News departments are buzzing about AIG's decision to honor the bonuses to its employees after receiving billions in TARP funds from the federal government. The President has expressed outrage over AIG's decision and has asked the Treasury Secretary to explore all legal options to stop the bonus payments. Talk radio hosts are livid. But all the outrage in the world fails to consider basic contract principles. The Wall Street employment contracts were executed before the TARP funds were available and a deal is a deal. A court of law in the State of New Jersey is likely to rule in favor of the big bonus employees if AIG fails to make the payments.
Employment contracts are rare because most employees are considered "at will", but not on Wall Street and across the Hudson in New Jersey for top brokers at New York and New Jersey's preeminent investment firms. It is very common for these firms to offer what is known as a retention bonus to its better performing brokers. Retention bonuses are given to employees as a means of retaining their services and keeping them from moving to a competitor. These bonuses, as well as other bonuses contained in the Wall Street employment contracts, are binding on the parties. In the State of New Jersey, employment contracts are binding like all other contracts. In New Jersey, basic contract principles will apply and an employer's failure to honor the payment of a bonus pursuant to an employment contract because of pressure from the federal government is not likely to convince a court that the breach was justified.
In the end it is highly unlikely that a New Jersey court will abrogate the Wall Street employment contracts. Of course, the employee can voluntarily reject the bonus, but this isn't likely. Political pressure and the public disclosure of the names of the recipients of the big bonuses may be the only way Washington will win this war.
