Even when your department was profitable, if the company lost money you did not receive a bonus. Your department's profits went toward keeping the company afloat by filling the gap between revenues and expenses. This was a good practice that produced strong companies that did reliable business because it created an internal culture of cooperation for total enterprise excellence. If your department was profitable but one of the other departments was losing money, it was in your best interest to try to do whatever you could to help that department get its act together.

At some point during the 1980s companies started to assign profit/loss accounting to individual departments and, sometimes, to individual producers. This created internal competition in the company between departments trying to out perform each other. This was thought to be a good thing but, in fact, it destroyed a lot of very profitable business.

An example of the dark side of internal competition: One evening a client and I were eating sushi at Hatsuhana in New York. He complained that because his fund's investment indenture limited his investments to U.S. Government guaranteed or fully collateralized investments, his short maturity fund could only invest in Treasury Bills and 2-year Treasury Notes while his competitors at other investment advisors were buying high quality commercial paper and making at least 25 basis points more in yield. We applied our brilliant minds to this problem and decided that auto loans and credit card receivables would be great collateral for what we called Collateralized Commercial Paper. So the next day I went back to my firm, a top-tier institutional broker/dealer, and proposed we create a new product: Collateralized Commercial Paper. The Corporate Finance Department informed me that they wouldn't be interested in working on the project because they would be doing the legal structuring work of creating the product and selling the idea to companies that might want to issue this Collateralized Commercial Paper, but the Commercial Paper Desk would get credited with all the profits. They knew it would be extremely profitable for the company but they didn't care because it wouldn't benefit their particular department. I reported the unfortunate news to my client who took our idea to Merrill Lynch. A couple of months later Merrill issued $8-Billion in Asset Backed Commercial Paper which was hailed as a brilliant and phenomenally profitable new financial product.

This is how we end up with outrageous situations such as paying huge bonuses to departments that created such enormous losses that they threatened the entire World financial system, as we see with AIG.

Whose great idea was this 'individual department P&L' system? Not only that, but whose idea was 'retention bonuses' that allowed the recipients to collect their money and leave the company? Does this idiocy fall on the shoulders of Human Resources? As a former executive in big-time business, I often found HR policies to be naive, ill informed, and arrogantly self-protective. Somebody in the company must accept the responsibility for negotiating faulty contracts that benefitted only the employees who grabbed the money and ran. While Barney Frank grills the top executives of AIG, perhaps he should be looking at the HR Department and its legal staff for the answer to why this happened. I have worked with these 'best-of-the-best' executives and I know them to be often over rated. What usually differentiates them is their attornies' negotiating abilities.

It is vital that we return our business culture to reality. What has happened is not complex at all. It is merely a situation where fast talking negotiators created an unrealistic imperative that foolish folk bought without fully understanding how unrealistic it truly was.