Compensation Controversies at AIG:
The Payments of Bonuses and the Implementation of a New Compensation System?
Jimmy Whitehead
Saint Leo University
Abstract
In the case in regards to American International Corp, Inc.’s (AIG) decision to make modification to its compensation system in early 2010 and to adopt a system that would influence incentive payments. In the previous year, the leading insurance corporation in the US faced a severe criticism from the public and the media after it announcing to the public that the company had paid out bonuses in the amounts of 1 billion dollars. Then shortly after making these payments, the government paid a total bailout of 173.3 billion dollars which rescued AIG from complete bankruptcy. This ultimately led to the criticism of AIG. Though AIG accredited the enormous bonus distribution to the compensation system followed at AIG and they felt the need to attract and retain its human capital. This forced the company to renovate its compensation system. As AIG elected for the "Forced ranking" system, it generated a debate on the relevance of relative performance rating systems. The performance system has its pros and cons in the evaluation of employees’ performance that could be equally satisfying. The industry questioned if AIG could be able to handle the pay challenges related to the job and whether it would be able to put in place the new incentive system that could be conducive to the right balance between rewarding its top performing employees and satisfying the government’s responsibilities.
Introduction
In 2010, American International Group, Inc. (AIG) publicized a new bonus system to improve their compensation strategy. AIG’s new system was called the "Forced ranking" system. 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...