Posted: April 24th, 2023

Compensation Controversies At AIG essay

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MG313 Case Study Research Paper
Case Study: Compensation Controversies at AIG
American International Group (AIG), a behemoth insurance and financial services company, became
notoriously famous in early 2009 for the payment of $165 million in retention bonuses to employees in its
Financial Products unit¾the business unit that was instrumental in bringing AIG to its knees and necessitating
the infusion of many billions of dollars in U.S. government bailout money, beginning in September 2008.
Although the near collapse of AIG was significantly influenced by “soured trades entered into by the company’s
Financial Products division,” the operations of other AIG units, such as the financial gambles of its 2,000-
employee Investments unit, helped cripple the company as well.i
Rapidly mounting financial losses had been occurring in the Financial Products unit for some time.
Consequently, AIG decided to unwind the business and shut it down. In early 2008, employees in the Financial
Products unit were asked to remain with the company through the unit’s shutdown and, essentially, to work
themselves out of a job.ii To entice talented employees to stay and work through the shut-down, a contractual
retention bonus plan was instituted.iii According to a report in The Washington Post newspaper, the Financial
Products employees were repeatedly assured, subsequent to the plan’s implementation decision being made in
March 2008, that AIG would honor these contractual obligations.iv
The bonus plan was highly favorable to AIG’s Financial Products employees¾and the bonuses were not really
linked to the employees’ performance. The unit’s employees were paid bonuses totaling $423 million in 2007,
despite a paper loss of $11.5 billion on toxic real estate assets.v The 2008 bonus plan, which was approved in
March of that year by the board of AIG’s Financial Products unit just as the unit’s losses were beginning to
surface,vi was “designed to kick in without regard to paper losses.”vii For 2008, paper losses on the toxic real
estate assets ballooned to $28.6 billion, and total losses were more than $40 billion.viii
According to New York Attorney General Andrew Cuomo, who was threatening legal action against AIG, 73
Financial Products employees received $1 million or more in bonus payments. The top recipient, identified by
The Wall Street Journal as Douglas Poling, received more than $6.4 million, whereas the next half-dozen top
bonus recipients got more than $4 million each. In addition, another 15 employees received $2 million or more,
and 51 other employees received $1 million or more.ix “Of those people collecting more than $1 million, eleven
. . . had already left the company [by March 209], Mr. Cuomo’s office said.”x
When the retention bonuses were paid in March 2009, the United States Congress, President Barack Obama’s
administration, and the public were outraged. Under intense political pressure, AIG’s then-CEO Edward Liddy,
who was working for only $1 a year, asked the “bonus recipients to cough up half their pay, despite fearing that
resignations would follow.”xi In defense of the bonuses, however, Gerry Pasciucco, head of the Financial
Products unit, observed that the “top bonus recipient, Douglas Poling, had successfully sold off several holdings
in his area of responsibility, infrastructure and energy investments. He’s done an excellent job at the task of
unwinding his book, of realizing value.”xii
In the ensuing emotionally charged days, employees of the Financial Products unit pondered what to do.
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According to one account, “employees have huddled in small groups in conference rooms off the division’s
main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One
employee said he had instructed his wife to call the police in the event his identity became known and a news
truck appeared at his home. Others commiserated that their children have been verbally abused in school.
Employees have passed around emails from colleagues who opposed returning the payments.”xiii
Some Financial Products employees decided to return their bonuses. Mr. Poling indicated he intended to return
his bonus.xiv “Fifteen of the top 20 recipients of the retention bonuses have agreed to give back a total of more
than $30 million in payments.”xv
Other Financial Products employees opted to keep their bonuses, perhaps the most notable of who is Jake
DeSantis, a Financial Products unit executive who received an after-tax bonus of $742,006.40. On March 25,
2009, in an Op-Ed contribution to The New York Times, DeSantis published an open letter to AIG’s then-CEO,
Edward Liddy, wherein he resigned his AIG position. DeSantis’ letter read in part:
After 12 months of hard work dismantling the company—during which A.I.G. reassured us many times we
would be rewarded in March 2009—we in the financial products unit have been betrayed by A.I.G. and are
being unfairly persecuted by elected officials. In response to this, I will now leave the company. . . . I take this
action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in
this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary
of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.
Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my
family for the benefit of those who have let me down.xvi
Because the U.S. government bailed out AIG, along with numerous other financial institutions, through the
Troubled Asset Relief Program (TARP), significant oversight of executive compensation was imposed on these
recipient companies. Kenneth Feinberg has played a key role in addressing the controversy over the AIG
retention bonuses. As the federal government’s overseer of executive compensation at AIG and other major
TARP recipients, Feinberg tried “to recover $45 million paid to the most highly compensated executives, but
AIG management . . . said reclaiming the entire amount would be difficult because many employees who
originally received retention awards have left the company.”xvii
In late October of 2009, Kenneth Feinberg, the federal government’s pay czar, rejected much of the proposed
pay package that AIG put forth for “a group of highly paid employees¾including five at the financial-products
unit whose problems helped nearly sink the firm¾as inconsistent with the ‘public interest’.”xviii Feinberg said
base salary should not exceed $500,000 annually; however, he did not rule out bonuses for financial-products
employees, which were scheduled to be paid in 2010.xix Feinberg also allowed AIG to “compensate executives
with ‘stock units’ tied to the value of four of its insurance units¾an outcome that executives at AIG had pushed
for in negotiations. The stock units . . . would be payable in three equal annual installments, starting two years
after they were granted¾in effect giving executives incentive to stay at the company and help it thrive.”xx
“Feinberg rejected AIG’s proposal that five high-paid officials at the financial-products unit get ‘significant
increases in cash base salary’ and total 2009 compensation of $13.2 million. He concluded that those employees
should get only the cash salaries that were in effect at the end of 2008.” xxi
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Topics to be Address:
1. Work Behaviors and Employee Needs
• What types of work behaviors did AIG intend to encourage through its retention bonus plan?
• Which needs seem to be important to the employees of AIG’s Financial Products unit?
2. Model of the Individual–Organizational Exchange Relationship
Using the model of the individual–organizational exchange relationship:
• Explain the relationship that employees of AIG’s Financial Products unit believed they had with the
company.
• Was this exchange relationship violated? How?
3. Movitation Theory
• Which motivation theory do you think has the most relevance for understanding the responses of the
Financial Product employees to the implementation and unraveling of the retention bonus plan?
• Explain the reasoning behind your answer.
4. Examples of Other Compensation Earned by Executives
• Do you believe the $1 million plus retention bonuses received by 73 employees of AIG’s Financial
Products was excessive? Why or why not?
5. Conclusion
• Do you think that the various decisions made by Kenneth Feinberg with respect to executive
compensation at AIG were justified? Explain the reasoning behind your answer.
SOURCE: This case was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of
Management, College of Business Administration, Valparaiso University.
Research Methods
• You should use the World Wide Web, electronic databases, financial data, the organization’s Annual Report,
biographies of founders, press releases, the organization’s website, promotional materials (including brochures,
catalogs, advertisements) and employee interviews (via phone, e-mail, or in person).
Length and Format of Report
• The body of the report must be a minimum of five pages (double-spaced).
• Use double-spacing and one-inch margins all around, with 10- or 12-point type. Use headings and subheadings
for each of the main divisions or paragraphs of the report. Proofread and spellcheck your work.
• The report must include these parts:
1. Cover Page. Title of report, name of organization studied, name of preparer, date, and course.
Base on the information provide in this case study, the course learning objectives
(be sure to cite and include) and research of comparison to similar corporations
and other different types of organization such as sports and entertainment
compensations:
Did Kenneth Feinberg make appropriate decisions regarding executive
compensation at AIG?
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2. Body of Paper
3. References—A list of the sources you used to gather the data to write the report, including names of those
interviewed and dates you interviewed them (whether by phone, fax, e-mail, or in person). Be sure to
DOCUMENT with a full notation, in the body of the report, which of these references was used, including
author, title, dates, page, etc.
4. Appendices.
i S. Ng and L. Pleven, “An AIG Unit’s Quest to Juice Profit¾Securities-Lending Business Made Risky Bets; They Backfired on
Insurer,” The Wall Street Journal (Eastern edition) (February 5, 2009): C1.
ii H.W. Jenkins, Jr., “The Real AIG Disgrace,” The Wall Street Journal (Eastern edition) (March 25, 2009):
A11.
iii Ibid. iv Ibid.
v R. Smith and L. Pleven, “Some Will Pay Back AIG Bonuses,” The Wall Street Journal (Eastern edition)
(March 19, 2009): A1.
vi R. Smith, J. Weisman, and L. Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay,” The Wall Street
Journal (Eastern edition) (March 26, 2009): C1.
vii Smith and Pleven, “Some Will Pay Back AIG Bonuses.”
viii Ibid. ix Ibid. x Ibid.
xi Anonymous, “The AIG Mess Gets Worse,” Business Week (4125) (April 6, 2009): 6.
xii Smith, Weisman, and Pleven, “Some at AIG Buck Efforts to Give Back Bonus Pay.”
xiii Ibid.
xiv Ibid.
xv Ibid.
xvi J. DeSantis, “Op-Ed Contributor: Dear A.I.G., I Quit!,” NY Times.Com,
http://www.nytimes.com/2009/03/25/opinion/25desantis.html (accessed February 6, 2014).
xvii M.A. Hofmann and J. Greenwald, “Treasury Ignored AIG Pay, Watchdog Says,” Business Insurance 43(37)
(October 2009): 3 (2 pages).
xviii L. Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass Muster¾Feinberg Rejects Chunks
of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That Nearly Toppled the Firm,” The Wall
Street Journal (Eastern edition) (October 23, 2009): A5.
xix Ibid.
xx Ibid.
xxi D.A. Hughes, A. Saha-Bubna, and M.R. Crittenden, “Feinberg Caps Pay at Rescued Firms¾But Five AIG
Executives’ Compensation Will Exceed $500,000 Cash Limit for ‘Good Cause’,” The Wall Street Journal
(Eastern edition) (March 24, 2010): C3; Pleven, “Executive-Pay Limits: AIG Compensation Plans Fail to Pass
Muster¾Feinberg Rejects Chunks of Packages for Highly Paid Workers; Bonuses Still Possible for Unit That
Nearly Toppled the Firm.”

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