AIG's Bonus Payments Controversy and its Decision to Adopt the 'Forced Ranking' System

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Case Details:

Case Code: HROB143
Case Length: 14 Pages
Period: 2009-2010
Organization: American International Corp, Inc. (AIG)
Pub Date: 2011
Teaching Note: Not Available
Countries: US
Industry: Insurance

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"[W]e must retain our talented employees and the huge amount of intellectual capital they have created over decades. To do that, we will need to have a compensation system that pays for performance, to be sure, but pays competitively in amount and composition" ¹

- Harvey Golub, Chairman, American International Group, Inc., on February 26, 2010.

"They need to have some type of a performance bonus program, only because their business is driven by individuals going out and closing deals… Retention is not a trivial matter for AIG, they do have to worry about executives leaving en masse." ²

- Phillip Phan, Professor, Johns Hopkins Carey Business School, in May 2010

Introduction

In February 2010, American International Group, Inc. (AIG) announced a new bonus system. Introduced by AIG’s CEO Robert H. Benmosche (Benmosche), the new system was called the "Forced ranking" system³. Under this system, the employees were given bonuses according to their ranking on a scale from 1 to 4. Industry observers felt that it had become necessary for AIG to revamp its bonus system after the severe populist outrage that it faced in March 2009. Mark Herr, a spokesman for AIG, said, "We need to hold on to talented people for the long haul, and long-term incentives which are clearly stated and transparent encourage employees to work for the greater good of the company…. They only earn the long-term compensation by achieving business-level goals."⁴⁵

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Introduction Contd... >>

1] 2009 Annual Report.
2] Hugh Son, "AIG Approves $380 Million for Manager Awards in 2010," www.bloomberg.com, May 12, 2010
3] Bud Fox, " AIG Overhauls Bonus System with Tiered Scale, Follows General Electric (GE)," www.benzinga.com, February 11, 2010
4]Hugh Son, "AIG Approves $380 Million for Manager Awards in 2010," www.bloomberg.com, May 12, 2010.
5]In April 2010, the company said that even Benmosche’s US$7 million salary and US$3.5 million in long-term incentive awards were linked in part to the "stabilization of AIG’s talent pool" and repaying AIG’s bailout debts.

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