AIG overhauls bonus system

NEW YORK (CNNMoney.com) -- AIG announced on Wednesday that it is changing the way it pays out bonuses to its employees, opting to determine compensation based on performance.

"Aligning pay and performance is the hallmark of many world-class organizations and is critical to our future success," AIG spokeswoman Christina Pretto said in an e-mailed statement. "By motivating and driving our talent, it will also help us remain competitive and ensure a strong, growing enterprise."

Previously, AIG had offered some of its employees retention bonuses based on length of service but not on performance. Those were the kinds of controversial bonuses that AIG paid to 400 employees who worked at AIG Financial Products, the division that wrote insurance-like contracts on banks' risky assets and are blamed for the company's near collapse.

AIG still has hundreds of millions of dollars left to pay in retention bonuses that were previously agreed upon with employees, but the company said that going forward, it will no longer issue those kinds of bonuses.

Under the new system, AIG employees' performance will be graded and compared to their peers to determine their annual compensation, including bonuses.

"The first step toward building a high-performance management culture is implementing relative performance ratings that will compare an individual's performance to that of others in his or her peer group," Pretto said. "These ratings will help ensure that our people are accountable, recognized and rewarded for their achievements."

AIG said it is testing out the new bonus plan for several thousand staff of its more than 100,000 worldwide staff members.

In an interview with The Wall Street Journal, AIG Chief Executive Robert Benmosche said AIG employees subject to the new bonus structure will be graded on a scale of one to four based on their performance.

Benmosche said just 10% of employees will be ranked in the highest ("one") grade, 20% will get a "two" grade, 50% will get a "three", and 20% will receive a "four." AIG's CEO said in the interview that the top 10% will receive "far more" than the others. The two middle grades will receive "meaningful" incentive pay and the bottom 20% will take home lower amounts.

Though the specific manner in which bonuses are determined will vary by country and department, AIG said that eventually the entire company's staff will have their compensation tied to performance in one form or another.

AIG has feuded with lawmakers and Obama administration officials over its bonuses for nearly a year.

The Treasury Department's "pay czar" Kenneth Feinberg required pay cuts for many of AIG's top brass last year, and Benmosche nearly quit over the decision. Benmosche argued that Feinberg's pay curbs would lead some of AIG's best minds to leave the company, and it would make attracting top talent to AIG difficult.

Ultimately, AIG was able to convince Feinberg to offer three of the company's top-earning employees higher compensation. In a memo that he wrote to the company staff in November, Benmosche said the ordeal left him exasperated over "the time and effort it is taking to ensure that our top 100 executives are compensated fairly."

"We are all working aggressively to overcome this compensation barrier that stands in the way of restoring AIG's value and allowing us to live up to our obligations to all stakeholders," Benmosche said in the memo.

Feinberg's office did not return request for comment.

The company reluctantly agreed to lawmakers' demands to ask employees who received the most controversial bonuses to return a portion of their compensation to the company. Nearly all of those employees have already done so, the company recently reported.