Federal pay limits create storm at AIG

American International Group Inc. chief executive Robert H. Benmosche's reported threat to quit two weeks ago — and subsequent pledge to continue his work at AIG — sets the stage for a battle over pay curbs while underscoring the enormous challenges AIG still faces, observers say. The Wall Street Journal reported this month that he was considering resigning because of executive compensation constraints imposed by the U.S. government, and particularly because of the most recent review by Kenneth Feinberg, the Treasury Department's special master for executive compensation at corporations that received bailouts from the Troubled Asset Relief Program. According to the report, which cited anonymous sources, Mr. Benmosche told directors he was “done” with the job he took in August — becoming AIG's third CEO since its 2008 bailout — because the pay policies hurt his ability to retain top executives. The report touched off a wave of speculation, and hours later, Mr. Benmosche sought to calm concerns by issuing an internal memorandum signaling that he planned to stay at AIG. The chief executive told employees he was “totally committed to leading AIG through its challenges,” while acknowledging that he had been frustrated by negotiations to devise an executive compensation plan that is “fair.” He called the pay issue a “barrier that stands in the way of restoring AIG's value” and repaying its government debt. Mr. Benmosche told employees he would continue “to fight on your behalf” and said the company is involved in discussions with Mr. Feinberg. Last week's development “raises the stakes,” said Bill Bergman, an analyst with Morningstar Inc. “AIG has made their case public, and it's clear they intend to fight this issue.” Mr. Benmosche's reported threat to step down might have “simply been the result of emotions boiling over,” but it could signal that the former MetLife Inc. chief executive is “under even more pressure than he anticipated when he took the job,” said Mark Lane, a research analyst with William Blair & Co. LLC. Last month, Mr. Feinberg ordered pay cuts averaging 50% for the top 25 executives at seven companies that had received Treasury bailout funding, including AIG. The rules apply to the rest of this year and are expected to be used as the basis for a compensation program for 2010. In addition, Mr. Feinberg is expected to rule on pay structures for the next 75 highest-paid employees by year-end. “There is likely a lot of push and pull going on, and it's possible that the solutions being offered by the government are even more severe than anticipated,” said John A. Challenger, CEO of executive recruiter Challenger Gray & Christmas Inc.

Two sides

Observers said there are strong pay arguments on both sides. “On one hand, there is a lot of political pressure; but on the other hand, the restrictions mean AIG is at a serious competitive disadvantage,” Mr. Lane said. The issue of executive compensation has become even more acute as the economy begins to recover and other job opportunities emerge, observers say. “I think there will continue to be an exodus of talent,” Mr. Lane said. “I don't think you will see a hundred employees walk out the door, but there will be some departures, and it will likely be the key players who decide to leave,” said Richard V. Smith, senior vice president at Sibson Consulting. “These are the exact people you need on your team to rebuild the company.” Beyond any short-term financial incentives, “employees are going to have to believe they have a future in the company,” said Mr. Bergman. And AIG still faces the massive challenge of rebuilding its franchise and “inspiring confidence” in its future, he added. AIG is working to sell assets, streamline its operations and improve profitability in an effort to repay the government bailout in which it received up to about $180 billion, while the government took a roughly 80% stake in the company. Mr. Benmosche, who came out of retirement to take the top job at AIG, is a “very driven CEO, and he does want to succeed,” said John Wicher of John Wicher & Associates Inc. But from the beginning, the new CEO “made it pretty clear he was going to do things his way,” Mr. Wicher said. For example, Mr. Benmosche disagreed with previous CEO Edward Liddy's approach to asset sales and, instead, implemented a slower approach to restructuring, believing that it would generate more money. In addition, AIG has rebranded its property/casualty business, formerly AIU Holdings, as Chartis Inc., in an attempt to separate and ultimately spin off the unit.

Improvements seen

While observers said it's too soon to judge Mr. Benmosche's performance, they noted that the company is showing signs of stability. AIG this month posted its second straight quarterly profit. A recovery in the value of its investments helped, although its underlying insurance operations reported lower revenue. Following the results, Moody's Investors Service said in a statement that the insurer has made progress on its restructuring plan and “will likely be able to repay the government loan.” Had Mr. Benmosche quit, the move likely would have had a destabilizing effect on the organization, observers said. “It is in the board's best interest to keep him in there. They do not want to go through this process all over again,” Mr. Lane said. At the same time, “his willingness to fight demonstrates he is not just going to roll over, and that might actually boost morale,” Mr. Wicher said. Meanwhile, Jacob A. Frenkel, AIG's vice chairman, retired early this month. In a Nov. 10 memo, Mr. Benmosche wrote that although Mr. Frenkel, who joined AIG in 2004, “had been contemplating this change for some time, Jacob had agreed to stay on to help AIG through its challenges. Now that AIG has stabilized, Jacob has decided to move ahead with his retirement.” Colleen McCarthy is an associate editor at sister publication Business Insurance. Mark A. Hofmann, a senior editor at Business Insurance, contributed to this report.