American International Group has responded to critics of the company's decision to make payments to retain certain executives, noting that it could lose valuable employees and even reinsurance contracts if it does not act to keep personnel.

Joe Norton, spokesman for AIG, said the company announced in September that it will pay retention bonuses to 130 executives. Since then, Congressman Elijah Cummings, D-Md., has questioned the practice, and there have been unconfirmed reports that payments in some cases could more than double some senior managers' annual salaries.

In a Dec. 1 letter to AIG Chairman and Chief Executive Officer Edward Liddy, Rep. Cummings said of the retention program, “The limited information that is currently available to the public about this program is insufficient to constitute the level of disclosure that the American taxpayers, who have bailed out this firm repeatedly in recent weeks, have the right to expect.”

Mr. Liddy, in a response letter to Rep. Cummings, said AIG's compensation committee of the board of directors has approved retention payments for 168 employees, including the 130 executives, plus an additional 38 who were subsequently added based on authority granted by the committee.

Mr. Liddy said of the retention program, “The base salaries for those involved in these retention payments range from $160,000 per year to $1 million per year, and the retention awards range from $92,500 to $4 million. These retention payments will be made in two installments over a 12-month period. These employees are highly specialized and/or are part of businesses that control billions of dollars of revenue and value that will be needed to repay the U.S. taxpayer.”

Congressman Cummings' letter said the retention program appears to be a “disingenuous 'slight of hand,'” as AIG announced it will not provide performance bonuses in 2008 but then chose to provide the retention program payments.

Rep. Cummings questioned why AIG needed to provide payments to keep its executives when major financial entities are in the midst of massive layoffs, and he added that AIG senior executives are “frankly lucky to still have jobs….”

Mr. Liddy responded in a December 5 letter to Rep. Cummings, stating that retaining key employees is critical for the company to maintain its standing in the eyes of reinsurers and rating agencies, and is essential for the company to be able to repay taxpayers.

“We would be doing a disservice to the taxpayer–and would place AIG's asset divestiture plan at risk–if we did not act decisively to ensure that our key employees remain with the company,” Mr. Liddy wrote.

The AIG conglomerate has been selling off assets to repay $150 billion in government loans it secured when it sustained billions in losses from its financial products unit.

Mr. Liddy noted that some reinsurers have requested provisions that would allow them to cancel reinsurance contracts upon the departure of critical AIG employees.

“Having appropriate reinsurance coverage in place is essential to the risk control for AIG's operations,” wrote Mr. Liddy. “Without appropriate reinsurance cover, the magnitude of losses on catastrophic events would seriously injure the financial strength of the company.”

Regarding Rep. Cummings questioning of why AIG is worried about losing employees in today's difficult economy, when other financial institutions are announcing major layoffs, Mr. Norton said, “AIG's managers are talented industry leaders. They have deep business relationships and experience in the markets that's not easily duplicated. Competitors have tried to hire AIG managers for years.” He noted that the competitors are becoming more and more aggressive as AIG managers have seen their assets depleted.

Yesterday, Kevin H. Kelley, chief executive officer of AIG's Lexington Insurance Company unit and president of AIG Domestic Personal Lines, quit his post. Ironshore Inc., where he will become CEO, called him “one of the most talented insurance executives in the last two decades.”

Responding to the news reports about the size of some of the retention payments, Mr. Norton said the company has not officially disclosed beyond what is in SEC filings made in September and November and what is contained in Mr. Liddy's letter to Rep. Cummings.

A September SEC filing noted that AIG executive vice president Jay Wintrob is receiving an award of $3 million under the program.

A November filing states executive officers participating in the program, including Mr. Wintrob and chief financial officer David Herzog, volunteered to delay payments, with the first installment delayed from December 2008 until April 2009, and the second installment delayed from December 2009 until April 2010.

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AIG Defends Retention Program Payments

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