AIG Advised to Limit Its Next Round of Bonuses
Wednesday, October 14, 2009
The Obama administration's "pay czar" has advised American International Group to scale back $198 million in bonuses due next March to employees at its troubled Financial Products unit as company and government officials try to avoid another public uproar over pay packages at the bailed-out insurance giant.
Kenneth Feinberg, the U.S. Treasury's point man for compensation, has indicated he wants future retention payments reduced at the troubled AIG Financial Products unit, according to a new report from the special inspector general overseeing the government's financial rescue program.
A public furor erupted earlier this year when AIG paid about $168 million in retention bonuses to employees at Financial Products, the unit whose complex deals nearly wrecked the insurance giant last fall. The same contracts that guaranteed those awards also promised similar payments in March 2010, and for months AIG has been scrambling to redraw those agreements in hopes of preventing another public debacle.
The report by special inspector general Neil Barofsky offers new details regarding retention payments to about 400 employees at Financial Products, which ranged from as little as 1 percent of an employee's base salary to as much as 36 times base salary. According to the report, one file administrator received $700, while an executive vice president took home $4 million. A kitchen assistant got a $7,700 bonus, while a senior administrative assistant raked in $87,500.
At the height of this spring's controversy, angry lawmakers grilled AIG's chief executive, protesters demonstrated in front of the company's headquarters and the House passed a resolution that would have taxed the bonuses at 90 percent. The Senate never signed on. Under pressure, AIG executives vowed to try to reduce future retention payments by at least 30 percent. They also asked employees at Financial Products who had received more than $100,000 to return some of their bonuses. Employees pledged to repay about $45 million.
But according to Barofsky's report, only about $19 million had been returned through August. Some employees have been waiting to see the outcome of ongoing negotiations between AIG, Feinberg and other government officials over future compensation, and Barofsky warned that if future payments are cut, "this may risk further employee turnover and a smaller recovery of voluntary repayments of the 2009" bonuses.
AIG said in a statement Tuesday that it continues to work through various compensation issues with Feinberg, "including future payments to employees of AIG Financial Products." The company noted that Financial Products employees "have until the end of the year to fulfill their commitments to return a portion of their March 2009 payment. We expect FP employees will honor their commitments. In the meantime, those employees are making considerable progress in unwinding trades and reducing risk at AIGFP."
Feinberg has sole discretion to set compensation for the five top senior executives plus the 20 highest-paid people after them at each of seven bailed-out companies -- AIG, Citigroup, Bank of America, General Motors, Chrysler, Chrysler Financial and GMAC. He expects to issue his initial wave of rulings this month.
Barofsky's report, which he is scheduled to testify about Wednesday before the House Oversight Committee, outlines the "staggeringly complex, decentralized system consisting of hundreds of separate compensation and bonus plans" that officials from the Federal Reserve Bank of New York discovered when they waded into the troubled insurance giant last fall. Over time, the report says, they identified nearly $2 billion in bonus, retention and deferred compensation programs spread among more than 60,000 employees, although the retention bonuses to several hundred Financial Products employees ultimately sparked the public outcry.
New York Fed officials received details about the bonuses months before the political firestorm erupted this spring, and they consulted with AIG, as well as outside lawyers, auditors and public relations firms about the potential controversy. Barofsky's report suggests that the Treasury Department mostly relied on information provided by Fed officials.
The result, according to Barofsky, is that Treasury invested $40 billion of taxpayer funds in AIG "without having any detailed information about the scope of AIG's very substantial, and very controversial, executive compensation obligations." Some senior Treasury officials weren't aware of the potentially explosive payments at Financial Products until late February, days before the issue blew up in public.
Barofsky found that the bonuses paid earlier this year "were consistent with the law in place at the time" and weren't prohibited under the federal government's bailout agreements with AIG. Still, Barofsky wrote, the failure of Treasury officials to fully grasp the scope and scale of compensation plans at AIG, particularly at Financial Products, "potentially resulted in a missed opportunity to avoid the explosively controversial events and created considerable public and congressional concern over the retention payments."
AIG's initial $85 billion bailout last September grew to a total taxpayer commitment of $180 billion by March, the same month the crippled insurance giant reported the largest quarterly loss in U.S. corporate history. Since then, AIG has continued to sell some operating units in an effort to pay down its government debt. The company hired a new chief executive and in August reported its first quarterly profit since 2007, even as it warned of continued volatility.