* For an explanation of the different approaches used by the AFL-CIO and the U.S. Securities and Exchange Commission to calculate total compensation, click here.

Cash for Trash: AIG Executives Get Rewards After Bringing Down Insurer

American International Group (AIG) has been kept afloat by more than $170 billion in federal assistance since September 2008.[1]  That works out to about $1,500 for every household in the nation.[2] But the New York-based giant insurer that nearly brought down the global financial system paid out more than $500 million in salaries and bonuses to hundreds of senior employees, even as it was being bailed out by the government.

The uproar over AIG pay reached a new level amid revelations in mid-March that it rewarded employees with $450 million in bonuses for 2008—when its stock fell from $57.14 a share to $1.57 a share.[3] Worse, $165 million of the payments were in the form of “retention” bonuses to employees of its financial products division, which sold the complex derivatives at the heart of the company’s financial troubles.[4] Even more ironic, 52 of the employees quit after receiving their “retention” bonuses.[5]

“AIG now stands for arrogance, incompetence and greed,” said Rep. Paul Hodes, a Democratic lawmaker from New Hampshire, in a hearing over the company's bonuses.[6]  

AIG recorded a $99.2 billion loss in 2008, with a record $61.7 billion loss in the fourth quarter alone.[7] Despite these losses, the insurer promised most of the employees at AIG Financial Products, its small London-based unit that in effect bet the entire company on the continuation of the housing bubble, that their 2008 bonuses would be at least as high as their 2007 bonuses.[8]  AIG’s market value plummeted to $2.7 billion on March 31, 2009, from nearly $190 billion in May 2007.[9]

Many of the executives who received multimillion pay packages from AIG were central in the cast of characters that brought the company to its knees. The list starts with Martin J. Sullivan, AIG’s CEO, who collected a severance package of nearly $50 million when he was ousted at a board meeting on June 15, 2008, after the insurer posted billions in losses on mortgage investments and came under investigation by the U.S. Securities and Exchange Commission.[10] It includes Joseph Cassano, who resigned in February 2008 as the head of AIG’s financial products division after it lost $11 billion but was allowed to keep $34 million in bonuses and draw $1 million a month in consulting fees from AIG for seven months.[11]

The list would be incomplete without mentioning Robert Willumstad, who replaced Sullivan as CEO in July 2008. He served as CEO for less than three months and initially collected a $22 million severance package that he later agreed to return after being criticized soundly.[12] The government then installed Edward Liddy as CEO, when it gave the insurer the first $85 billion in federal assistance last September. Liddy, the third CEO in less than a year, agreed to work for only $1.[13] 

AIG’s poor pay practices expose the fallacy of “pay for performance.” The potential windfalls for executives were so massive they had nothing to lose by taking on huge risks to create the illusion of profits. 

AIG treated Sullivan’s resignation, effective July 1, 2008, as retirement for “good reason,” which, under his employment agreement, enabled him to collect a severance package valued at $47 million, including a pro rata bonus of $4 million, so long as he agreed not to compete with the company for a year.[14] AIG also agreed to pay Sullivan’s taxes on the "golden parachute," severance package.[15]

What’s more, AIG gave Sullivan an annual pension of more than $3.2 million.[16] AIG promised him full early retirement benefits through three retirement plans: the deferred compensation plan, AIG’s Excess Retirement Income Plan and Supplemental Executive Retirement Plan, as well as the company’s United Kingdom Pension Plan.[17] AIG also agreed to pay his health benefits for three years and give him an office and assistant through Dec. 31, 2008.[18] 

“Mr. Sullivan received what many on Main Street would consider a lot of money for very little if any performance,” Lynn Turner, a former chief accountant at the SEC, said in congressional testimony on a hearing about AIG last fall.[19]

Earlier, news accounts of junkets by AIG executives, including a $440,000 getaway to a spa in California and a hunting trip to the U.K.—after receiving the taxpayer bailout—prompted New York State Attorney General Andrew Cuomo to stop a payout of $19 million out of the total $47 million Sullivan was to receive. He also froze $600 million in bonuses for top executives.[20] “They are not going to have the party and leave the hangover for taxpayers,” Cuomo said at an Oct. 15 news conference.[21] 

Outrage over the recent bonuses prompted the U.S. House of Representatives to hold investigations into the payments and pass legislation approving a near total tax on bonuses paid this year to employees of AIG and other companies that have accepted federal bailout funds. The bill is not expected to gain traction in the Senate, but the discussion has proved effective: Cuomo said that AIG executives had returned some $50 million of the bonuses within days of receiving them.[22]

Still, a group of AIG shareholders led by the AFSCME and the AFL-CIO wrote to the government-appointed trustees of AIG to hold its board accountable for the disconnect between pay and performance by withholding votes for James Orr, the head of the board compensation committee when the bonuses were approved.