Abstract

This case is about American International Corp, Inc.’s (AIG) decision to revamp its compensation system in early 2010 and to adopt a "Forced ranking" system that would influence incentive payments. In 2009, the leading insurance corporation in the US faced a severe backlash from taxpayers and the media after it became public that the company had made bonus payments to the tune of US$1 billion. Such a generous payout, coming as it did shortly after a total bailout of US$173.3 billion from the government which rescued AIG from complete bankruptcy, led to this backlash. Though AIG attributed the enormous bonus distribution to the compensation system followed at AIG and the need to attract and retain its human capital, critics were not convinced, and this forced the company to revamp its compensation system. As AIG opted for the "Forced ranking" system, it once again triggered a debate on the appropriateness of relative performance rating systems. Industry observers also wondered whether the company would be able to handle the pay related challenges and whether it would be able to implement the new incentive system that sought to strike the right balance between rewarding its top performers and keeping the government happy.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the two philosophies of the compensation system (The Entitlement Philosophy and the Pay for Performance Philosophy).
• Analyze the pros and cons of both forms of compensation system.
• Understand different types of compensation, especially issues related to bonus and incentives.
• Analyze the dilemma that AIG had got into due to its Employee Retention Plan 2008.
• Analyze the change in the compensation system at AIG.

Keywords

Compensation system, Incentive, Bonus, Relative performance rating system, Forced Ranking System, Employee Retention Plan, Performance management, Entitlement Philosophy, Pay for Performance Philosophy, Regulations, Pay Czar, Bonus Controversy, Economic downturn, AIG