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AIG to Base Bonuses, Incentive Pay on Ranking System

Source: WSJ

Posted on 10 Mar 2010

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American International Group Inc. is basing its upcoming round of bonuses and incentive pay on its new "forced ranking" system that measures the performances of about 10,000 employees, according to people familiar with the matter.

AIG, which reported a $10.9 billion net loss for 2009, is struggling to incentivize employees to stay on at the government-controlled insurer after the bonuses and a final batch of retention awards are paid out in the coming weeks. The last few months have already seen the departures of some senior managers in divisions such as compliance, legal and human resources, according to a person familiar with the matter.

The latest plans also come as U.S. compensation czar Kenneth Feinberg is finalizing 2010 pay packages for certain employees at AIG and other companies that have received large amounts of federal aid. Some of AIG's 100 most highly-paid employees, who are subject to Mr. Feinberg's jurisdiction, are among the "pilot group" participating in the forced-ranking system, an AIG spokesman said. The rankings were just one factor used to determine these individuals' compensation, he added. Mr. Feinberg is expected to announce his pay determinations this month.

AIG is ranking employee performance from 1 to 5 to help it decide who will get raises and larger incentive awards. About 10% of the employees will receive a "top" ranking, 20% will be rated "excellent," and 50% will see their performance rated "solid." The bottom 20% will be considered to be "needing improvement," of which a small number could get a "performance warning." The company is aiming to pay bonuses for 2009 to eligible employees by the end of this month, according to people familiar with the matter.

AIG Chief Executive Robert Benmosche, who is pushing the forced-ranking system, is trying to demonstrate to the public and the government that AIG is paying employees for their performance and not just for staying at the company, which is nearly 80% owned by U.S. taxpayers. The 65-year-old CEO believes AIG's restructuring and turnaround strategy depends largely on its ability to pay competitively to attract and keep talent. With two large foreign life-insurance units now being sold for $51 billion, AIG is counting on its remaining businesses to help achieve its goal of repaying another $47 billion to taxpayers in the coming years.

In a town-hall meeting with employees last month, Mr. Benmosche said he is trying to find a way to give some people raises, according to people familiar with his comments. But for that to happen, Mr. Benmosche reportedly said, the company needed to improve its old system, where most of AIG's top 500 employees were deemed either "top" or "excellent" performers. He drew an analogy with the recent Winter Olympics, saying that finalists for the events all performed well, but they couldn't finish the race at the same time and all win medals, the people familiar with the comments said.

The forced-ranking system is already proving controversial among some AIG employees, who feel it could hurt morale and create more uncertainty at a time when the company is struggling. Human-resources staffers at AIG have been reassuring employees that they won't be forced to leave the company if they fall into the bottom group, and that the company will help them improve their performances, according to a person familiar with the matter.

The roughly 10,000 individuals whose 2009 performances are being ranked under the system comprised about a tenth of AIG's global work force of 96,000 at the end of 2009. Those ranked include managers and senior managers, and AIG expects to roll out the system to a bigger universe of employees in 2010.