Posted on 15 Mar 2010
According to a person familiar with the matter, American International Group Inc. (AIG) plans to hold back $21 million in bonus payments Monday to former employees, a move that could set the stage for more battles over employment agreements that have enmeshed the carrier in controversy for a year.
The hold-back comes as AIG will also on Monday pay out $46 million to current and former employees of its financial products unit, the division responsible for the soured trades that precipitated the massive government rescue of the company in 2008, the person said.
AIG executives hope that payout will represent the final round retention payments, or bonuses, arising from contracts with unit employees agreed upon before the company's bailout. About $105 million was paid out last month as mostly current employees agreed to accept a smaller amount in exchange for an earlier payout.
The payments Monday will mostly go to ex-workers who left the company after parts of the financial products business, known as AIGFP, were wound down or sold. Five current employees will divide about $6 million, according to the person familiar with the matter.
The goal of the hold-back of $21 million is two-fold. First, AIG needs to come up with $5 million more to satisfy pay czar Kenneth Feinberg's demand that AIG recoup about $45 million of the bonuses paid in March 2009 following public outrage over the payouts. So far, AIG employees, mostly current and some former, have agreed to return $40 million, in part by accepting lower 2010 payouts.
More broadly, during that controversy, then-chief executive Edward Liddy committed to trying to reduce the overall retention bonuses the company had to pay to AIGFP employees. Mr. Feinberg has urged that that goal be met.
Both AIG and Mr. Feinberg have said the employment contracts are legally binding. It appears, however, that AIG believes the terms of the contracts enable it to limit payouts under certain circumstances.
Under the agreements, the company can reduce the retention payments by the amount of income ex-workers have earned after their departure from AIG, the person familiar with the matter said. AIG sent out letters about two weeks ago to 60 to 70 former employees, asking them how much income they earned after leaving AIG in 2009.
The company thinks it doesn't owe money to some of these employees "because of a variety of factors," said the person familiar with the matter. These "include but are not limited to these former employees earning money away from AIGFP during 2009 as well as other contractual deficiencies."
Andrew Goodstadt, an attorney who represents about a dozen AIGFP former and current employees, said: "Although the employee-retention plan provides for an offset in some circumstances for income earned from another employer outside of AIG in 2009, I'm unaware of any purported contractual deficiencies that would entitle AIG to withhold any of the money that the former employees are entitled to be paid."
The $21 million AIG thinks it is entitled to hold back would cover the $5 million it needs to reach $45 million, plus about $16 million more. The company may still have to pay a portion of the $21 million to ex-workers who demonstrate that they are owed payments by AIG, the person familiar with the matter said.
Separately, Mr. Feinberg is reviewing new 2010 pay packages for a group of AIG's most highly paid executives, including some at AIGFP.
Most of the individuals who created the unit's problematic mortgage trades have left the firm, and the remaining employees at AIGFP are working to close out or unwind thousands of derivatives tied to interest rates, bonds, currencies and commodities.
As of Mar. 9, AIGFP has reduced the notional amount of its outstanding trades to $800 billion from $1.9 trillion in September 2008, and the number of contracts to 14,800 from 44,000.
Some AIG officials predict it will take at least the remainder of this year for AIGFP to unwind the bulk of its remaining positions and until then, it will need to retain some key individuals to oversee this process. A resolution of the March 2010 retention payments and the terms of new 2010 compensation deals could determine whether the remaining employees at AIGFP stay or depart this spring.