AIG's "Executive Retreat": Due to Budget Cuts, The Light at the End of the Tunnel Has Been Shut Off Until Further Notice

Recently, America has been up in a lather over AIG spending $440,000 on what is widely being described as an "Executive retreat" a week after asking for a multimillion dollar bailout related to this financial crisis. The White House even went so far as to send out the head spokesperson to call the move "Despicable." As a PR move, the retreat at a posh resort on the heels of a bailout was not that great of an idea. However, as is often the case with news items, once you dig down below the headlines, reality is a little more complicated.

First off, if one reads descriptions of what actually went down, beyond the enumeration of $23,380 worth of spa treatments, it becomes apparent that this was not a junket for the executives. This was the annual sales convention for the top life insurance agents at the company. Those agents are under the auspices of the AIG American General insurance division, not the financial division that caused the need for the bailout. Company executives were present, because having a sales convention without at least a few executives is sort of pointless. It would be a bit like having the office Christmas party without the boss, but we'll get back to that in a bit.

So, what exactly is a sales convention? It is not the sort of convention you think of with a convention center hall full of vendor booths. A sales convention is a nice vacation that the company throws for its top producing agents, the small percentage of agents who bring in the most new business. The company puts those agents up at a nice hotel and plans a buffet of interesting group activities and treats. Gratis spa treatments and rounds of golf are fairly common on the activity buffet, because the stereotype of the tax bracket that the qualifying agents inhabit is that men relax playing golf and women relax getting pampered at the spa. The convention includes some meetings and banquets where the cream of the crop are recognized--those who brought in $1,000,000 or more of new business, for example--and where management psyches up the agents for another year of getting doors slammed in their faces, being called all sorts of nasty names, and occasionally having weeks or months with no paycheck. It gives the execs and agents a chance to meet face-to-face, probably the only time in a year that the agents will have in-person contact with the people who can best solve a problem with a client. The sucking up factor is not to be discounted here. In effect, the sales convention is the office Christmas party, except only the most profitable workers get invited.

Emp. Peng. is a life and health insurance broker, though he does not work with AIG, and we had some firsthand experience participating in the exact kind of "junket" that is at the heart of this kerfluffle with AIG. Last summer, one of the companies he contracts with sent us on a trip to Las Vegas. Entirely on the company's tab, we spent four nights at the Bellagio. We were wined and dined every one of those nights. Two nights we were treated to an upscale dinner and a show. One night they rented out Siegfried and Roy's Secret Garden and Dolphin Habitat, where we got exclusive access to the animals, the animal keepers, a private dolphin show and a dolphinside buffet dinner with open bar. One night, we had a private banquet punctuated by Rat Pack impersonators. During the day, we had our choice of activities, including not only the spa treatments and golf outings that are getting AIG in trouble now, but also a tour of Hoover Dam and a cooking demonstration luncheon with the resort's head chef in their multimillion-dollar studio kitchen. Except for Hoover Dam, we were taken everywhere by stretch limousine. For all four days, all we had to pay for was breakfast and whatever we did on our free time.

With the activities enumerated like that, it is hard not to consider such an event extravagant. In the bigger picture of the company, though, this is essentially giving a bonus, but only to the two dozen or so of several hundred independent agents who are the most profitable to the company. While I don't know the final cost of the Las Vegas trip (renting out the dolphin habitat is not as costly as it seems: $3,500 flat fee, plus $100 per person for catering), it likely was not any more expensive than giving a pittance of a bonus to everyone, but unlike a universal bonus, the agents have to work harder to bring in enough business to qualify for it. The convention is a carrot that the company dangles out to get agents to bring in more money to the company. Incidentally, this sort of trip is not the reason for high premiums on insurance, any more than annual bonuses paid to supermarket checkers are the reason for the outlandish price of milk. This is keeping the bottom of the corporate food chain happy, and happy corporate plankton is profitable corporate plankton. In fact, by encouraging agents to write more new policies, the conventions help keep premiums down. The bigger the pool of insured people, the lower premiums can be for everyone since risk is spread out further.

Back to the AIG thing. The media reports that the tab for the event was $440,000. That is a lot of money. What they don't report is how many people that covered. The closest I have been able to find is some reports indicating that there were fewer than 10 executives present. Assume a 1:4 executive to agent ratio, which was about what our Las Vegas trip had, and factor in that it is customary that everyone on these trips is allowed to bring a Plus One, and let's call it 80 people. Our Vegas trip had around 50, and was with a smaller company, so 80 people is not an outlandish guess. That's $5,500 per person, not a lot for a high end vacation, especially at a place where the rooms are $600 a night. The $23,380 for spa treatments would get 126 of the spa's least expensive treatments and 65 of the most expensive. So, yes, they went to a posh resort, and that doesn't look all that great in the papers the next morning. On the other hand, a weekend at the Motel 6 and breakfast at Denney's just doesn't make being an insurance agent worth the bother. And it is a lot of bother. That four days in Las Vegas represented more hours I spent with my husband than I had gotten in the previous two months, including sleep time. It is not all that uncommon for him to come home at 10 p.m., exhausted, and have to be out of the house again at 7 o'clock the next morning for another 18 hour day that he will return from famished because he didn't have time for even a snack.

So, what were AIG's alternatives? These conventions are planned a year in advance. One highlight of the final banquet is finding out where next year's convention will be. I can't imagine the execs announce a location without getting a block of rooms booked first, so this St. Regis shindig was probably booked at least a year ago. The bailout became an option less than a month ago. The plane tickets would likely have already been purchased by the time the bailout was offered, and my experience with these conventions is that, however posh the resort is, the company flies you in on the cheap, which means coach, nonrefundable. Had they cancelled the convention, the accounts would still show the company "wasting" several thousand dollars on airfare for tickets not used, and whatever other nonrefundable deposits they had placed a year before the economy started going down in flames.

Even more than that, there is the impact on the workforce. The agents being feted at this wingding were not AIG employees (possibly explaining why media characterizes it as an executive retreat: the execs were the only actual AIG employees there). Most insurance companies work on the commission-only independent contractor system, so the agents are self-employed, not employees. The one and only perk of being an independent contractor with an insurance company is the prospect of going to convention. There is no health insurance--it may surprise you to find out that insurance agents don't get breaks on insurance--no 401(k), no sick days or paid vacation. Even though the conventions are most-expenses-paid, it still means taking time off, and in a commission-only job, if you don't sell (not just "don't work," but "don't sell") you are not getting paid. The agents who went on this "executive retreat" had worked their asses off to get that far, and for the company to pull the rug out from under them at the last minute would create an even worse environment for the agents than there is now. Emp. Peng. would probably have a colorful similie involving sexual frustration here, but he has his own blog if he wants to post those.

The insurance agents are already suffering from conditions beyond their control and not of their doing. Given the media coverage, people are simply not buying AIG insurance products now. The agents can't sell. Fortunately, AIG does not use a captive agent system, so the independent contractors who were selling AIG policies aren't completely screwed. In a captive agent system, the agent is only allowed to represent the products of one company, and if the company goes south, the agents have no prospects for income aside from going to another company and starting at the bottom. AIG used independent brokers who, if they were smart, had a variety of companies at their disposal and could switch to offering policies from other companies. Still, to make convention, an agent almost has to give preference to one company over another in assessing which policy would be most suitable. It is malfeasance for an agent to go with a preferred company to make convention when there is another company in their portfolio that better suits the client's needs, but if all else is equal, there is nothing unethical about an agent steering to a preferred provider. The agents who make convention are the ones who push the company's products the most, and are the best hope for ever making the company profitable again. It is not in the company's long term interest to piss these people off, and that is exactly what would happen if the carrot got snatched away at the last minute, after they had put in all the work. Pissed off insurance agents leave the companies that piss them off. If you like having the same agent for your insurance policies two years running, it is in your best interest to let the companies do what it takes to keep the agents happy and affiliated with them. They really do precious little in this area. That $440,000 was possibly the entire annual "keep the agents from quitting" budget.

Appearances matter, though, and AIG should definitely not be using any of the bailout money to finance the sales convention. Nonetheless, there was a very sound business reason for having this "executive retreat" go on in spite of the troubles with the company. The timing was bad, leaving AIG without any good options for handling the situation, but I think that they may have made a good call in pissing off taxpayers and keeping their agents happy, rather than pissing off taxpayers and the agents. Face it: this "junket" was planned way before the bailout became necessary or possible, so as soon as word leaked out of plans for it, taxpayers and the White House would have found it despicable whether it was allowed to go on or not. At least by allowing the convention to go forward, they have a shot at retaining some of the folks who can save the company in the long run.