American International Group Inc. (AIG) said last Thursday that for paying stock salary to its top executives for 2009, it will use stock units instead of common stock. The stock units will reflect the value of AIG’s common stock.

This arrangement is in compliance with the U.S. pay czar Kenneth Feinberg’s pay rules on the bailed-out insurer. According to the final determination by the pay czar, AIG’s highest-paid employees could be compensated in either common stock or stock units.

The pay czar decides compensation-packages for the highest-paid employees at all the firms that have received bailout money and have not repaid yet. After slashing 50% pay of the top 25 earners in October at seven firms that have received substantial support from the Troubled Asset Relief Program (TARP), last month, the pay czar announced a new set of pay restrictions on top executives at four of those firms. The primary intention of the pay czar is to enable the bailed-out firms to repay government money by controlling excessive pay among others.

AIG received federal assistance worth $182.5 billion, which rescued it from collapse in Sep 2008. In exchange, the government now owns nearly 80% of the company. Recently, in a major revelation, CEO, Robert Benmosche disclosed his intention of repaying the bailout money back to the U.S. government within the next two years. For this, AIG expects to use earnings from business operations and also by disposing unnecessary businesses in the near term.

Just a day before this revelation in a regulatory filing, AIG said that Vice Chairman and general counsel Anastasia Kelly resigned, effective immediately, due to federal pay restraints on her compensation. However, AIG intends to pay about $2.8 million toward severance to its ex general counsel.

Kelly was among the five executives who notified on Dec 1, 2009, that they would resign and collect severance benefits if their pay was cut significantly by the U.S. pay czar. The other four executives withdrew their notices later.

We believe that while most of the major institutions in the financial market like Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Citigroup Inc. (C) and Goldman Sachs Inc. (GS) have repaid the government loan, AIG has to take vigorous and strategic steps to rid the company of consequent government interventions and pay restrictions.

Zacks Investment Research

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