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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Introduction cont..

AIG, the largest insurance corporation in the US in terms of assets and employees⁶ , faced a severe backlash from taxpayers when it revealed after obtaining a government bailout of US$173.3 billion⁷ , that it had distributed US$165 million as bonuses to some of its executives. The bonus payments for the Financial unit were expected to reach US$450 million while the total bonuses amounted to US$1.2 billion⁸. The generous payout, coming as it did shortly after a total bailout of US$173.3 billion by the Federal Reserve Bank of New York⁹ in 2008 rescued AIG from complete bankruptcy, only created fury amongst the taxpayers and raised several debatable questions about the government as well as AIG’s compensation plan. Though AIG

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attributed the enormous bonus distribution to the compensation system that it followed, taxpayers, experts, and the government raised several questions that forced AIG to revamp its compensation system. In early 2010, AIG opted for the "Forced ranking" system which once again triggered a debate on the appropriateness of relative performance rating systems¹⁰.

Excerpts >>

6] For the year 2009, AIG had assets worth US$ 847.585 billion and it employed 116,000 people. (Source: www.faqs.org/sec-filings/100331/AMERICAN-INTERNATIONAL-GROUP-INC_10-K.A/)
7] Nathan Yau, “AIG Bailout: Where $173 Billion Went,” http://flowingdata.com, March 20, 2009.
8] Elizabeth MacDonald, “American Inconscionable Group,” http://emac.blogs.foxbusiness.com , March 17, 2009
9]The Federal Reserve Bank of New York is the Reserve Bank of America
10]While supporters of relative performance rating systems such as “forced ranking” system argue that forced ranking creates a true meritocracy, critics contend that this approach is unfair to people performing at an acceptable level and creates an unhealthy cult-of-star culture.

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