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AIG Announces New Forced Distribution Plan

Source: Wall St. Journal

Posted on 11 Feb 2010

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In the wake of public and politicians' outcry over its controversial retention bonus practices, American International Group., Inc. (AIG) announced it will revamp its annual bonus program into a new "forced distribution plan" whose goal is to "pay the best people for their performance," says AIG CEO Robert Benmosche.

Under the plan, thousands of AIG employees will be ranked on a scale of 1 to 4 based on their performance relative to their peers, and their annual variable compensation, which may include bonuses, will be determined by their rank. Individuals ranked in the top 10% will get far more relative to their peers.
Similar forced-ranking systems have been used by large companies such as General Electric Co. under its previous chief executive, Jack Welch, to reward top performers and to weed out underperforming employees over time.

Benmosche learned the method from an ex-GE executive when they worked at Chase Manhattan Bank in the 1970s, and implemented such a system at MetLife Inc. while he was CEO of the New York-based life insurer from 1998 to 2006.

AIG's situation, however, is starkly different from those companies. The insurer is struggling to repay more than $90 billion in U.S. taxpayer money and has lost a number of key employees since its September 2008 bailout, which continues to attract negative publicity. Some company insiders worry the new performance initiative could create additional anxiety among employees at a time when morale in parts of AIG remains low, according to people familiar with the matter.

Benmosche says he strongly believes employees ought to know where they stand within the company. "The risk is that it will make people nervous. But where people are worried about their jobs, I believe it's helpful to know if they are doing well and are in the top 80%, or if they need to work harder," he said in an interview Wednesday.

"I want to make sure we're paying the best people for their performance," he said, adding the company also needs to "better differentiate performance in order to show the American public we are not just giving money away."

The move could help appease AIG's overseer on compensation issues, U.S. pay czar Kenneth Feinberg, who has taken issue with AIG's previous plans to pay retention bonuses to some executives at the corporate level and insurance units so long as they stayed at the company.

Feinberg last year told the AIG CEO that the company ought to have a strong process that ensures the company pays for performance, instead of making retention awards that aren't tied to performance criteria, recalls Benmosche.

Under the plan, only 10% of the ranked employees will get the top "1" ranking and stand to receive much more year-end incentive pay, which could comprise variable salary and bonuses, than those with lower rankings.

About 20% of employees on the scale would be ranked "2," and 50% would be ranked "3." Individuals in these two categories would generally be considered to have performed well or within expectations and would get meaningful incentive pay commensurate with their rankings.

A bottom group of 20% would be ranked "4" and receive lower variable pay. Details of the performance-management system have been planned at AIG since last fall. It is currently being implemented among an initial group of several thousand AIG staff, out of the more than 100,000 it employs world-wide.

Benmosche has made compensation a top priority since he started at AIG in August. At town-hall meetings over the last few months, he has told employees he wants them to be paid competitively and fairly for their work, in part through variable compensation.

"We ought to have enough flexibility to make sure that if you shoot the lights out in a given year, we have enough variability to give you a big increase for that year," the 65-year old CEO declared last summer.

Benmosche said performance-appraisal systems previously in place at AIG weren't discriminating enough. In one case, he said, there was a ranking system with four categories, but about half of the people got the highest rating, and half got the second rank. "You can't have 50% in the top," he said.

Last week, AIG announced the hiring of Sandra Kapell, a former senior MetLife human-resources executive who is expected to help manage and coordinate the forced-ranking system's rollout.

At MetLife, some staffers there "hated" the system, says Benmosche.

AIG, he said, is unlikely to impose a requirement that underperformers leave. GE, meanwhile, has in recent years shifted away from a ranking system based on numerical categories that cuts the bottom 10% of employees, but still aims for "employee differentiation" in its performance appraisals, a spokeswoman says.

A forced-ranking system can change a corporate culture and "help drive consistency across large organizations," says Ravin Jesuthasan, leader of the talent-management consulting practice for Towers Watson, a human-resources consultancy that isn't involved in AIG's planned ranking effort.

He adds the approach can work in turnaround situations by helping to foster more accountability, but could be risky if not communicated well or "if links to consequences like compensation and employment are not properly thought through."