Friday, May 22, 2009

AIG May Find CEO Candidates Shun Obama Pay Parity

American International Group Inc., seeking its fifth leader since 2005, may be rejected by candidates unwilling to accept a pay cut to try to turn around a money-losing insurer under pressure to limit executive pay.

“You’re not going to get someone to do it for a dollar a year,” said Chief Executive Officer Edward Liddy in an interview yesterday after announcing he would step down as soon as the board finds his successor. Liddy agreed to that salary after taking over in September when the insurer committed to turning over a majority stake to the U.S. in exchange for a bailout.

Treasury Secretary Timothy Geithner said Wall Street’s pay practices encouraged excessive risk-taking and helped precipitate the financial crisis. Congressman Elijah Cummings, who called last year for Liddy’s resignation, said New York- based AIG should use President Barack Obama’s $400,000 salary as a model in setting compensation for the next CEO.

“They’re not going to be able to pay the next guy what he’s worth, so that will limit the people they can get dramatically, I think you’re looking at a retiree or a politician to step in there,” said Alan Johnson, managing director of Johnson Associates Inc., the executive compensation firm. “It may cost the American people several billion dollars to save a few million dollars on salary.”

Liddy’s successor will need to stem the exodus of customers and repay loans included in a $182.5 billion U.S. bailout while balancing the demands of Congress and the Treasury. AIG is trying to spin off or sell businesses including life insurance, property coverage and airline leasing.

‘Fall on the Sword’

“Unfortunately, in any kind of turnaround, you need somebody who you are going to pay like crazy who is going to be the bad guy and fall on the sword, and then you find somebody to be the good guy,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore.

AIG spokeswoman Christina Pretto didn’t return a phone call seeking comment.

Geithner called for changes in compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid- June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

Martin Sullivan

Martin Sullivan, the last AIG CEO to work a full year, received compensation valued at $14.3 million for 2007. He was replaced last year by Robert Willumstad, who was forced out in September. AIG had a net loss of $99.3 billion last year on bad bets tied to subprime mortgages, compared with profit of $6.2 billion in 2007.

“We have no problem with people earning a decent living, but the compensation needs to be tied to performance and not create an atmosphere of excessive risk-taking,” Cummings said in a Bloomberg Television interview.

Cummings, a Maryland Democrat, led congressional criticism of AIG for paying $165 million in bonuses in March to employees of the Financial Products unit whose business brought the company to the verge of bankruptcy. Liddy, who was not working for the company when AIG agreed to the bonus plan, said some retention pay was necessary to keep workers so they could unwind trades.


Parity with Obama’s pay at AIG “is, of course, not a sufficient salary for what the job entails,” said Howard Wheeldon, a senior strategist at BGC Partners LP in London. A qualified candidate might only accept such a salary for a short period, with the understanding it would be increased, he said.

“The president may be the most underpaid critical senior leadership role in America so that’s probably not a good benchmark for a large and complex insurance company,” said David Wise, a senior consultant with Hay Group, a Philadelphia- based consulting firm.

“They’re going to have to find someone for whom being the head of AIG is a feather in his or her cap,” and sees the job as public service, said John Challenger, CEO of Challenger Gray & Christmas, a Chicago-based placement company. “The most highly qualified people aren’t going to want the risk -- the risk to the reputation.”

Liddy called the job “the most intellectually stimulating” in America, and said stabilizing the company helps the economy. He said that his work was complicated by the input from so many regulators and lawmakers and said leaders at other companies receiving federal aid face similar difficulties.

‘Role of a Lifetime’

“You’d think it’ll be a role of a lifetime to ascend to the top of these companies, but with the government kind of mucking about these companies it’s a risky business for anybody,” Challenger said. “You’d be crazy to take this job.”

The U.S. bailout of AIG includes an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-linked assets owned or backed by AIG. The insurer tapped more than $40 billion from the credit line.