Rubbish week for: American International Group (AIG)

What happened

The massive American insurance company AIG has been slated recently for paying out $165m in bonuses - seeing as the US government rescued it with a $180bn support package last year, and as it recorded a quarterly loss of $61.7bn for the last three months of 2008 (the largest ever in corporate history).

Following heavy criticism verging on the wrath of God from pretty much everyone - the media, politicians, the public, and even Barack Obama himself - AIG decided to retract the bonuses. But it had already paid them out. So on Wednesday, AIG chairman Edward Liddy had to ask employees who got more than $100,000 to repay at least half.

Why

The bonuses were allegedly for staff retention purposes. Of course, with the vast majority of the financial and insurance companies of the world crumbling like sand castles in a hurricane, you might suppose that staff would be pretty happy to keep their jobs, bonus or not.

Obviously the attempt to get the bonuses back (actually quite successful, with nine of the top ten receivers due to return the cash) was because of the public and political anger it provoked.

But why didn't AIG anticipate the reaction to the bonuses in the first place to avoid messing around with their employees and their public image? Well, that's the $165m question.

Were they to blame?

It's not acceptable to give obscenely large bonuses to the most high-ranking members of your company when your company is depending on an amount of government aid so large that, were it a country, it would have the 178th largest economy in the world.

Equally to the point, it's absolutely not acceptable to mess round your employees by giving them bonuses then demanding them back. This not only sours employee-employer relations so much that it makes an utter joke of the bonuses having originally been for "staff retention" purposes, it also holds employees liable for management's mistakes.

And AIG completely failed to anticipate America's reaction to the bonuses. An awful example of throwing caution to the wind when it should have been most cautious, and a real lack of understanding of what was going on in the world outside its office.

How to avoid doing the same

First and foremost, don't pay staff more than you can afford or more than is proportionate to your business's growth. Make sure this term is written up clearly in any employee contract.

And before you hand out any end of year bonus, really interrogate your own finances to make sure that that money won't be needed further down the line. Obviously it's important to reward employees, but don't get carried away. If you're struggling financially to retain a key employee, see if they would accept a promotion or more holiday days rather than more bonus cash.

Finally, never, ever lose sight of your public image. Startups should never be seen to be being extravagant anyway, and doing something that angers your public is a crucial oversight of reputation management.

Smarta sympathy score

There were so many mistakes compounded here that it's hard to know where to begin. The only slightly redeeming factor is that AIG did indeed manage to get most of the top employees to pay back the bonuses without losing them as staff. Too little too late, but a slither of a saving grace.

Smarta Business Builder

To help you on your business journey, we've created Smarta Business Builder, the complete online tools package for growing your business. Website Builder, Business Plans, Accounting Software, Legal Documents and Email - all in one place - from just £20 per month with no contract! Try it out today.