American International Group Inc, the insurer saved from collapse by a $170 billion taxpayer bailout, was ordered by the US Treasury to scale back its $1 billion plan to give retention pay and bonuses.
AIG agreed to reduce some retention payments in 2009 by 30 per cent and tie bonuses to the company’s recovery, according to a person briefed on the matter and a letter from AIG Chief Executive Officer Edward Liddy. The New York-based insurer still plans to distribute about $165 million on March 15 because of legally binding contracts, said the person, who declined to be identified because the talks weren’t public.
“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to Treasury Secretary Timothy Geithner in a March 14 letter, which said the contracts predated his arrival. “With the benefit of hindsight, I would have designed these differently and at significantly lower levels.”
AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer. Liddy has vowed AIG will repay “every penny” to the US for its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers.
Geithner telephoned Liddy on March 11 to demand changes to AIG’s plan, an administration official said separately.
The Treasury didn’t try to halt the March 15 payments after determining that AIG was legally bound to make them.
The discussions with Geithner focused on the insurer’s financial products unit, the credit-default swaps subsidiary whose losses pushed AIG to the brink of bankruptcy in September. AIG planned to give about $450 million in retention pay to about 400 employees of the unit, Bloomberg News reported in January.
Retention payments for employees in the unit will be cut by at least 30 per cent for 2009, Liddy wrote. The top award in the unit was about $6.5 million, and six other employees got more than $3 million, Liddy wrote.
About $165 million tied to 2008 must be paid by March 15, on top of $55 million distributed in December, according to an AIG summary. Another $230 million for 2009 retention may be reduced as parts of the unit are sold and employees are laid off.
The Treasury may try to recoup some of the payments to financial products unit employees, according to the person familiar with the talks.
AIG also agreed to restructure a separate annual cash bonus plan that covers some of the senior corporate executives. The so-called senior partners of AIG, who include some of the top 50 managers, were scheduled to get $9.6 million in cash now.
Installment Plan
Under a new arrangement they will get half of the awards now, and the rest in installments in July and September if they show progress in the firm’s turnaround plan, according to the person briefed on the matter. The total average payment per person is $224,000, the person said.
Liddy said the 25 highest-paid “active contract employees” in financial products agreed to reduce their remaining 2009 salary to $1, from an average of more than $270,000. Anyone with a title of associate vice president or higher will have the rest of his or her 2009 salary cut 10 percent, he wrote.
Liddy’s letter didn’t mention any cuts in retention payments at other business units. In addition to the financial products unit, AIG planned to award $148 million to top executives, and about $470 million for three other subsidiaries, according to a person familiar with the plans and company documents. An AIG filing on March 2 confirmed a Bloomberg report that all its employee retention plans might cost $1 billion.
Impact on Recovery
Liddy told Geithner that the changes may make it harder for him to engineer a recovery at AIG, once the world’s biggest insurer, saying that he can’t retain top talent “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”
Liddy, who was recruited by the U.S. to run AIG after the bailout, isn’t among those entitled to a payment.
The company’s fourth-quarter loss of $61.7 billion was the biggest ever recorded for any U.S. company, and AIG considered seeking court protection before accepting the U.S. rescue in September.
The retention payments have drawn criticism from U.S. lawmakers who objected to giving millions of dollars to employees who may have helped deepen the global credit crisis.
Representative Elijah Cummings, a Maryland Democrat, has said AIG showed a “pattern of deception” in its disclosures, and Representative Brad Sherman, a California Democrat, asked during a December hearing whether AIG’s retention payments are appropriate for executives who “are part of the team that ran the company into the ground.”
To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net
