AIG plans $249m in retention bonuses
American International Group Inc., the insurer criticized by Congress for handing out retention bonuses after its U.S. bailout, said the awards will cost the company $249 million in the last two quarters of this year.
The earmark includes $93 million for the division with AIG’s Financial Products, the unit that sold derivatives blamed for the firm’s near-collapse last year, the company said today in a regulatory filing. AIG said the entire retention program will cost $1.09 billion, including $824 million already incurred through June 30 and $19 million for 2010 and 2011 combined.
“The public will perceive this very poorly,” said Frank Glassner, chief executive officer of pay consulting firm Veritas LLC. He said better plans provide more incentive for employees to improve performance and AIG’s approach is “a poorly designed pay program that shareholders and taxpayers will have to bear the brunt of.”
Retaining employees without provoking congressional ire will be a challenge for Robert Benmosche when he replaces CEO Edward Liddy next week. Lawmakers proposed a 90 percent tax on the awards after AIG paid $165 million to employees of the swaps unit in March. The New York-based insurer, which lost more than 45 executives to rivals including Ace Ltd. and Chubb Corp., said the payments prevent staff from quitting.
The insurer expects costs in the last six months of this year of $64 million for property-casualty employees, $62 million for life insurance staff, $13 million for asset management and $17 million for other workers, according to the filing. Christina Pretto, an AIG spokeswoman, declined to comment.
‘Distasteful’ Payments
Liddy told lawmakers in a March 18 hearing that while the Financial Products bonuses were “distasteful,” he needed to keep those employees to unwind trades and prevent a shock to the economy. Most of the unit’s workers will be gone before the final round of retention payments, he said.
AIG is discussing the awards with U.S. compensation official Kenneth Feinberg. The $1.09 billion retention total AIG reported today increased from the $1.08 billion disclosed in May. The final tally may be lower if employees forfeit the awards, AIG said.
The insurer “has to convince” Feinberg that it is appropriately rewarding performance without encouraging excessive risk-taking, said Meg Reilly, spokeswoman for the Treasury, today in an e-mailed statement.
‘Appropriate Balance’
“We are not going to provide a running commentary on that process, but it’s clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance,” Reilly said. The plan to tax the payments stalled in Congress and was never passed.
New York Attorney General Andrew Cuomo said March 24 employees have agreed to give back $50 million of the $165 million round of payments, and it might be possible to recoup $80 million.
AIG’s board began reviewing a retention program in June 2008 because of the decline of its shares, AIG said in an April 30 filing. The board acted “promptly” to hold onto employees with cash awards after getting an $85 billion credit line in its first U.S. rescue on September 16, the insurer said.
“I fully recognize the devastating loss of personal wealth you’ve suffered, and pledge to you my personal commitment to provide an opportunity for substantial wealth creation through a combination of cash and equity awards,” Liddy wrote in a Sept. 22 letter included in the April filing.
AIG’s businesses were “adversely affected” by the criticism surrounding the bonuses in the first quarter, including customer cancellations of annuity contracts, AIG said in May. AIG rebranded its two biggest non-U.S. life units and its main property-casualty division to distance the subsidiaries from the company.
About 4,600 executives and employees will get the bonuses that exceed a total of $1 billion, Bloomberg News reported in January, citing people familiar with the matter.
Source: Bloomberg