AIG determined that its top in-house lawyer was entitled to the money under the company's severance plan, whose terms say certain executives can resign and collect severance if their pay is reduced significantly, the people said. The move comes amid recent scrutiny of Ms. Kelly's actions in a December pay dispute involving her and four other senior executives. AIG's board engaged an outside law firm, Orrick, Herrington & Sutcliffe LLP, this month to review Ms. Kelly's actions after she advised other executives on what they could do to protect their rights to collect severance benefits. Ms. Kelly also helped them arrange for outside counsel, a spokesman for her has previously said.
The executives notified the insurer on Dec. 1 that they were prepared to resign and collect severance benefits if their pay was cut significantly by the U.S. pay czar, who was reviewing pay packages for a group of 75 AIG executives at the time. The four others, who work at AIG's insurance and financial-services units, later withdrew their notices, leaving only Ms. Kelly's outstanding. She subsequently told the company she would resign, according to a person familiar with the matter.
The law firm's investigation looked into whether Ms. Kelly performed her duties properly as the firm's general counsel and as an executive who would be affected by the pay czar's determinations, according to people familiar with the matter. The attorneys gave the AIG board's compensation committee a verbal report earlier this month, people familiar with the matter said.
One person familiar with the report said the law firm's findings "can be interpreted in a number of ways." The committee concluded Ms. Kelly's conduct shouldn't prevent her from receiving severance, people familiar with the matter said.
The severance plan was put in place before the government bailed out AIG last year. Earlier this month, U.S. pay czar Kenneth Feinberg capped annual cash salaries for most executives at $500,000, and Ms. Kelly's pay stood to be reduced significantly, say people familiar with the matter. Ms. Kelly has been at AIG since 2006 and was appointed vice chairman this year. The company is expected to name a new general counsel soon.