American International Group Inc (AIG), the insurer saved from collapse by a US$170 billion taxpayer bailout, was ordered by the US Treasury to scale back its US$1 billion plan to give retention pay and bonuses.
AIG agreed to reduce some retention payments this year by 30 percent 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 planned to distribute more than US$165 million yesterday 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 US Treasury Secretary Timothy Geithner in a letter on Saturday that said the contracts predated his arrival.
“With the benefit of hindsight, I would have designed these differently and at significantly lower levels,” Liddy said.
AIG, whose fourth-quarter loss was the worst in corporate history, earmarked US$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 Wednesday to demand changes to AIG’s plan, an administration official said separately. The Treasury didn’t try to halt yesterday’s 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 US$450 million in retention pay to about 400 employees of the unit.
Retention payments for employees in the unit will be cut by at least 30 percent for this year, Liddy wrote. The top award in the unit was about US$6.5 million, and six other employees got more than US$3 million, Liddy wrote.
About US$165 million tied to last year had to be paid by yesterday, on top of US$55 million distributed in December, an AIG summary said. Another US$230 million for retention this year 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, the person familiar with the talks said.
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 US$9.6 million in cash.
Under a new arrangement, they will get half of the awards and the rest in installments in July and September if they show progress in the firm’s turnaround plan, the person briefed on the matter said. The total average payment per person is US$224,000, the person said.
Liddy said the 25 highest-paid “active contract employees” in financial products agreed to reduce their remaining salary for this year to US$1 from an average of more than US$270,000. Anyone with a title of associate vice president or higher would have the rest of his or her salary cut 10 percent for the year, 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 US$148 million to top executives and about US$470 million for three other subsidiaries, a person familiar with the plans and company documents said. An AIG filing on March 2 confirmed a Bloomberg report that all its employee retention plans might cost US$1 billion.
The retention payments have drawn criticism from US lawmakers who objected to giving millions of dollars to employees who may have helped deepen the credit crisis.
US Representative Elijah Cummings has said AIG showed a “pattern of deception” in its disclosures and Representative Brad Sherman asked during a December hearing whether AIG’s retention payments were appropriate for executives who “are part of the team that ran the company into the ground.”
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