August 20, 2009 / 4:54 PM / in 10 years

AIG chief's salary structured to reflect risk

NEW YORK (Reuters) - AIG, the bailed out insurer whose pay practices sparked outrage earlier this year, has agreed to a $10.5 million pay package for its new CEO — a stark contrast to his predecessor’s $1 pay but drawing zero outcry from politicians or regulators.

Pedestrians walk past a window of an American International Group (AIG) building in New York's financial district September 16, 2008. REUTERS/Lucas Jackson

The approval for a package, with a cash component that dwarfs what many competing insurers’ CEOs have received, may be a sign that the Obama administration and lawmakers have begrudgingly accepted that even firms that took federal funds will have to pay top dollar to attract, and keep, executives.

“I’m sure they are not happy about it, but these companies have pushed the White House and Congress enough to get across the message, ‘we have to do business,’” said Paul Sorbera, president of Alliance Consulting, a financial recruitment firm.

AIG, the recipient of $80 billion in taxpayer loans, said on Monday that its pay agreement for new Chief Executive Robert Benmosche had been approved in principle by compensation czar Kenneth Feinberg.

Feinberg, recently appointed by the Obama administration, has oversight of executive pay at seven companies that have taken hefty loans from the government including AIG, Bank of America and Citigroup.

Benmosche’s total compensation, while out of sync with what the average American earns, is in line with salary, bonus and benefits paid to other insurance executives. Still, it is hard to reconcile with the $1 salary his predecessor Ed Liddy took.

Compensation experts say Benmosche’s compensation had to be large enough to get him to stick around. His compensation has been structured to include more cash than was paid to AIG CEOs in years past, although he is also to get significant stock awards.

“AIG is under a lot of scrutiny from the government,” said Joe Sorrentino, managing director with executive pay consultancy Steven Hall & Partners. “It and other companies may be trying to create compensation plans that do not (reward) executives to take excessive risks” that may benefit their stock in the short term, he added.

AIG said it will pay Benmosche, who became CEO on August 10, a salary of $3 million in cash and $4 million in fully-vested stock. He also could receive a bonus valued as high as $3.5 million.

Once the world’s biggest insurer, AIG was forced to recruit a new leader after Liddy, who accepted the CEO job within hours of its September 16, 2008 bailout, left after 11 months.

Liddy said his tenure at AIG — for which he relocated to New York from Chicago, leaving behind his wife and extended family — had been one of the most difficult in his life, in big part because of grueling criticism from Capitol Hill.

“You don’t normally get people to work for $1. This guy (Liddy) was patriotic, but he wasn’t going to stick around forever,” said Frederick Lipman, a lawyer who has written several books about executive compensation practices.

AIG was rescued by the federal bailout after it ran up massive losses on investments linked to subprime mortgages, which slumped in value as the U.S. housing market collapsed.

MORE CASH THAN PEERS

The $3 million cash payment to Benmosche, a former CEO of MetLife, is about three times the cash paid to the chiefs of several other big U.S. insurers. None of those firms has taken federal funding.

Last year, Ace Ltd’s CEO Evan Greenberg was awarded a salary of $1.2 million; $1 million was paid to Travelers Cos Inc’s CEO Jay Fishman; Robert Henrikson, chairman and CEO of MetLife, also got a salary of $1 million; and Prudential Financial Inc CEO John Strangfeld received a salary just shy of $1 million.

Those figures are in line with what Benmosche was paid in his last four years as MetLife’s chairman and CEO, regulatory filings show.

To be sure, all of these executives, including Benmosche, were awarded much more than $1 million per year when you account for bonuses, option awards, and other perks.

AIG’s agreement to pay Benmosche a higher cash sum may, more than anything else, be an acknowledgment that he has taken on one of the riskiest jobs in corporate America.

“These are financial professionals. They look at the risk-reward in an opportunity, and AIG has a ton of risk,” said Sorbera.

It could also turn out to be one of the most thankless jobs, if Liddy’s experience is anything to go by. He was scorned by lawmakers and picketed by citizens at Congressional hearings earlier this year, after AIG proceeded with $169 million in retention bonuses to employees of a controversial money-losing financial products unit.

“If I were him I’d take the $1 million, then ask for $2 million more for all the aggravation of having to deal with Congress,” said Lipman. “His counterparts don’t have that aggravation factor.”

Benmosche, 65, retired from MetLife in 2006, after taking the company from a mutual insurer owned by policyholders to a publicly traded company on the New York Stock Exchange. By the time he left, MetLife had become the biggest U.S. life insurer.

Reporting by Lilla Zuill; Editing by Tim Dobbyn

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