A Wall Street firm loses billions of dollars, nearly destroying its business and crippling the nation's economy. But top executives still receive huge bonuses?

As crazy as that sounds to most Americans, paying such bonuses even after a company suffers big losses is common practice on Wall Street, and it's at the heart of the outrage surrounding insurer AIG.

Employees of the insurer's financial-products unit received $165 million in so-called retention bonuses, payments designed to keep valued employees from quitting. The bonuses are paid out no matter whether the employee had a great year or a horrible one.

In Wall Street's high-stakes competitive culture, paying top people to stay in their jobs has been the norm for years.

"It's basically a bribe, so your employees don't bolt and take their clients with them," said Chuck Collins, a senior scholar at the Washingon-based Institute for Policy Studies and an executive compensation expert.

Even though most bonuses paid to Wall Street employees are tied to performance, retention bonuses have ignited anger since the government began pouring billions of dollars of taxpayer money into the financial system to keep banking and insurance firms from collapsing.

The furor over American International Group's million-dollar payouts to employees who nearly toppled the insurance giant is turning a spotlight on what critics say is a frequent abuse in the way corporate executives are paid.

In all, AIG is shelling out $450 million in so-called retention bonuses. Such payouts have been used to keep coveted employees from jumping ship during periods of corporate upheaval, typically caused by a merger or bankruptcy. But as overall executive-pay levels have surged, executives increasingly have used retention payments to ladle out more money to themselves while walking out the door, critics say.

Executives "have been using these as a vehicle to scoop extra compensation for themselves for years," said David DeBoskey, an executive-pay expert at San Diego State University. "Retention bonuses have been used for nefarious purposes to enrich executives of organizations where their futures are uncertain."

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A quieter payment » Retention bonuses have been overshadowed in recent years by other forms of executive pay -- including salaries, regular annual bonuses and stock options -- that generated far louder howls of protest.

But retention pay was thrust into the executive-compensation debate with the disclosure by AIG that it paid $165 million to employees of its Financial Products division. The unit made disastrous bets on securities known as credit-default swaps that ultimately led to billions in losses and necessitated a government bailout costing $170 billion to keep a failure of the company from bringing down the global financial system.

Outrage over the bonuses intensified last week as New York Attorney General Andrew Cuomo revealed that 73 AIG workers received bonuses of $1 million or more, including 11 who have since left the company.

Critics say it's incongruous for AIG to dish out millions to employees of a unit that lost more than $40 billion last year, especially because the unit is being gradually dissolved. But AIG says it promised the payments to about 400 employees in early 2008 -- before the depth of the financial crisis became known.

At the time, the unit "was expected to have a valuable, ongoing role at AIG," the company said in a five-page memo prepared last week for the Treasury Department. The company contended that it was legally obligated to honor the contracts that call for the bonuses. But some legal experts say the government might have some options to block or reverse the bonuses.

The House on Thursday sought to create a tax that would confiscate potentially all of the payouts, though some lawyers say trying to reclaim the bonuses might cause more harm than good. "All commerce throughout the world is dependent on the sanctity of contracts," said James Donovan, a Los Angeles attorney.

Such moves could make it difficult for financial companies to recruit employees because they might fear their employment contracts would be broken, he said.

Some compensation experts say the bonus agreements were reasonable last spring when Wall Street thought it could rebound intact from the subprime debacle. At the time, the financial engineers who concocted the exotic securities were highly sought-after. And arguably traders who create such securities might be the best people to unwind them.

"Just like you need Bernie Madoff to help you find where all the money went even though you'd rather throw him in jail and never talk to him again, you need the people who were involved to help undo" the securities, said Adam Zoia, founder of executive search company Glocap in New York.

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Contracts versus lawsuits » Still, critics argue, the AIG payouts underscore the excesses that have marked retention bonuses in recent years. Despite the uproar, the payments have been commonplace at several firms, most recently at investment bank Merrill Lynch.

Last month, The Wall Street Journal reported that Morgan Stanley plans to pay up to $3 billion in retention bonuses to 6,500 brokers in its joint venture with Smith Barney. Morgan Stanley has received $10 billion in bailout funds.

In a December survey of 264 companies across a variety of industries, business consultant Watson Wyatt Worldwide found that 9 percent of companies had added, or expected to add, a special retention bonus. An additional 21 percent were considering doing so.

"It's part of this Marie Antoinette syndrome of Wall Street," said Collins of the Institute for Policy Studies. "They're completely in a bubble, and they don't understand how these payments are perceived."

They do now.

The bonuses at American International Group, which is nearly 80 percent owned by taxpayers, have drawn howls of outrage from President Barack Obama on down to workers on Main Street.

AIG has argued that retention bonuses are crucial to pulling the company out of its crisis. Without the bonuses, the company says, top employees who best understand AIG's business would quit -- an assertion that critics of the payments quickly rejected.

"I'm very skeptical that retaining the people who made the mistakes is a good idea," said Rep. Barney Frank, chairman of the House Committee on Financial Services. "I think we have a strong case to get some of those bonuses back."

Experts say it won't be easy.

For starters, AIG's retention payments were guaranteed in the executives' contracts. By breaking them, AIG says it would risk triggering a wave of employee lawsuits. And the cost of those lawsuits would likely dwarf the size of the retention bonuses.

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Missed opportunities » Critics say the government could have done more to prevent the AIG bonuses.

Peter Morici, a business professor at the University of Maryland, said the government could have forced AIG to re-negotiate the bonus contracts so employees would be paid less. He noted that the government demanded similar concessions from unionized autoworkers before agreeing to bail out General Motors and Chrysler.

"It seems like no effort was made to negotiate with the AIG people and that the government gave them whatever they want," Morici said. "If we forced autoworkers to take less, we could have done it with AIG employees."

As for AIG's argument that failure to pay the bonuses would send employees running for the exits, some experts say that would be just fine.

"There's a lot of unemployed Wall Street workers that could be brought in as fresh blood," said Stephen Davis, a senior fellow and expert on corporate governance at Yale University.

Otherwise, Davis said, paying bonuses to executives of faltering companies risks creating a "a grab-and-go culture."

"The danger is that this kind of culture could spread to other companies," he said. "People could see this as their moment to get what they can before the gate closes."