(DEPARTMENT OF THE TREASURY LOGO) [y83707y8370701.gif]
 
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220

March 23, 2010
Mr. Robert Benmosche
President and Chief Executive Officer
American International Group, Inc.
70 Pine Street
27th Floor
New York, NY, 10270

          Re:   Proposed Compensation Payments and Structures for Senior
Executive Officers and Most Highly Compensated Employees
(“Covered Employees 1-25”)

Dear Mr. Benmosche:
          Pursuant to the Department of the Treasury’s Interim Final Rule on
TARP Standards for Compensation and Corporate Governance, the Office of the
Special Master has completed its review of your 2010 compensation submission on
behalf of the senior executive officers and next 20 most highly compensated
employees (“Covered Employees 1-25”) of American International Group, Inc.
(“AIG”). Attached as Annex A is a Determination Memorandum (accompanied by
Exhibits I and II) providing the determinations of the Special Master with
respect to 2010 compensation for those employees. 31 C.F.R. § 30.16(a)(3)(i).
          The Interim Final Rule requires the Special Master to determine
whether the compensation structure for each Covered Employee 1-25 “will or may
result in payments that are inconsistent with the purposes of section 111 of
EESA or TARP, or are otherwise contrary to the public interest.” Id. On
October 22, 2009, the Special Master issued a Determination Memorandum
containing principles designed to ensure that 2009 compensation for AIG’s
Covered Employees 1-25 satisfies this public interest standard.
          The principles established for 2009 must continue to govern
compensation at the five remaining recipients of exceptional assistance in 2010.
Generally, these principles require that:

  •   There can be no guarantee of any “bonus” or “retention” awards among the
compensation structures approved by the Special Master.     •   Base salary paid
in cash should not exceed $500,000 per year, except in appropriate cases for
good cause shown. The majority of each individual’s base salary will be paid in
the form of stock that will immediately vest, in accordance with the Interim
Final Rule, but will only be redeemable in three equal, annual installments
beginning on the second anniversary of the date stock salary is earned, with
each installment redeemable one year early if AIG repays its federal
obligations.

 

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  •   Total compensation for each individual must be appropriate when compared
with total compensation provided to persons in similar positions or roles at
similar entities, and should generally target the 50th percentile of total
compensation for such similarly situated employees.     •   If—and only
if—grants of incentives are appropriate in light of AIG’s circumstances at the
end of 2010 and a particular Covered Employee achieves objective performance
metrics developed and reviewed in consultation with the Office of the Special
Master, the employee may be eligible for a long-term incentive grant. These
incentives must be granted in restricted stock that will be forfeited unless the
employee stays with AIG for at least three years following grant, and may only
be redeemed in 25% installments for each 25% of AIG’s TARP obligations that are
repaid. Long-term incentive grants must not exceed one third of a Covered
Employee’s annual compensation.     •   Any and all incentive compensation paid
to these employees will be subject to recovery or “clawback” if the payments are
based on materially inaccurate financial statements, any other materially
inaccurate performance metrics, or if the employee is terminated due to
misconduct that occurred during the period in which the incentive was earned.  
  •   “Other” compensation and perquisites, and supplemental executive
retirement plans, must remain subject to the limitations described in the 2009
determinations.

          AIG’s submissions followed these important principles to some extent,
but modifications are required to make certain that compensation for AIG’s
Covered Employees 1-25 satisfies the public interest standard. Accordingly, the
compensation structures approved by the Special Master vary in the following
respects from AIG’s proposals:

  •   The number of Covered Employees 1-25 earning more than $500,000 in cash
salary will be five, rather than 10, as proposed by AIG.     •   For AIG
Financial Products executives who received cash “retention” awards in 2010, cash
salaries generally have been frozen at the levels set in the October 22, 2009,
determination, with a single exception capped at $450,000.     •   Overall
compensation packages will be reduced to levels more appropriate in comparison
with total compensation provided to employees in similar positions or roles at
similarly situated companies.     •   A greater portion of overall compensation
must be allocated to incentive compensation that must be paid in long-term
restricted stock and that may be granted only upon the achievement of objective
performance goals.     •   All stock salary must be redeemable only in three
equal, annual installments, with each installment redeemable one year earlier if
AIG repays its federal obligations. AIG has informed the Office of the Special
Master that a repayment of federal obligations occurred on March 19, 2010.
Accordingly, upon certification of that repayment by AIG’s compensation
committee, the redemption of each installment of stock salary may be accelerated
by one year.

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          As described in the attached Determination Memorandum, AIG must also
continue to observe the following prescriptions described in the Special
Master’s 2009 determinations:

  •   The achievement of any performance objectives must be certified by the
compensation committee of AIG’s Board of Directors, which is composed solely of
independent directors. These performance objectives must be reviewed and
approved by the Office of the Special Master.     •   The employees will be
prohibited from engaging in any hedging or derivative transactions involving AIG
stock that would undermine the long-term performance incentives created by the
compensation structures.     •   AIG may not provide a tax “gross up” of any
kind to these employees.

These requirements are described in detail in the attached Determination
Memorandum.
          Pursuant to the Interim Final Rule, AIG may, within 30 days of the
date hereof, request in writing that the Special Master reconsider the
determinations set forth in the Determination Memorandum. If the Company does
not request reconsideration within 30 days, these initial determinations will be
treated as final determinations. Id. § 30.16(c)(1).
Very truly yours,
-s- Kenneth R. Feinberg [y83707y8370702.gif]
Kenneth R. Feinberg
Office of the Special Master
for TARP Executive Compensation
Enclosures

cc:   Jeffrey Hurd, Esq.
Marc R. Trevino, Esq.

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ANNEX A
DETERMINATION MEMORANDUM
I. Introduction
          The Emergency Economic Stabilization Act of 2008, as amended by the
American Recovery and Reinvestment Act of 2009 (“EESA”), requires the Secretary
of the Treasury to establish standards related to executive compensation and
corporate governance for institutions receiving financial assistance under the
Troubled Asset Relief Program (“TARP”). Through the Department of the Treasury’s
Interim Final Rule on TARP Standards for Compensation and Corporate Governance
(the “Rule”), the Secretary delegated to the Office of the Special Master for
TARP Executive Compensation (the “Office of the Special Master”) responsibility
for reviewing compensation structures of certain employees at institutions that
received exceptional financial assistance under TARP (“Exceptional Assistance
Recipients”). 31 C.F.R. § 30.16(a); id. § 30.16(a)(3). For these employees, the
Special Master must determine whether the compensation structure will or may
result in payments “inconsistent with the purposes of section 111 of EESA or
TARP, or...otherwise contrary to the public interest.” Id. § 30.16(a)(3)(i).
          American International Group, Inc. (“AIG” or the “Company”), one of
five remaining Exceptional Assistance Recipients, has submitted to the Special
Master proposed 2010 compensation structures (the “Proposed Structures”) for
review pursuant to Section 30.16(a)(3)(i) of the Rule. These compensation
structures apply to five employees that the Company has identified for 2010 as
senior executive officers (the “Senior Executive Officers,” or “SEOs”) for
purposes of the Rule, and 17 employees the Company has identified as among the
most highly compensated employees of the Company for purposes of the Rule (the
“Most Highly Compensated Employees,” and, together with the SEOs, the “Covered
Employees”). Three employees who otherwise would have been included in the Most
Highly Compensated Employees departed the Company prior to the date of this
memorandum.
          The Special Master has completed the review of the Company’s Proposed
Structures for the Covered Employees pursuant to the principles set forth in the
Rule. Id. § 30.16(b)(l). This Determination Memorandum sets forth the
determinations of the Special Master, pursuant to Section 30.16(a)(3)(i) of the
Rule, with respect to the Covered Employees.
II. Background
          On June 15, 2009, the Department of the Treasury (“Treasury”)
promulgated the Rule, creating the Office of the Special Master and delineating
its responsibilities. The Rule requires that each Exceptional Assistance
Recipient submit proposed compensation structures for each Senior Executive
Officer and Most Highly Compensated Employee. 31 C.F.R. § 30.16(a)(3)(i).
          On October 22, 2009, after reviewing submissions of proposed
compensation structures from AIG, the Special Master issued determinations
regarding 2009 compensation structures, and amounts potentially payable
thereunder, for AIG’s senior executive officers and certain most highly
compensated employees (the “2009 Determinations”). The 2009 Determinations
included principles designed to ensure that 2009 compensation for the applicable
employees would not “result in payments that are inconsistent with the purposes
of section 111 of EESA or TARP, or

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are otherwise contrary to the public interest.” 31 C.F.R. § 30.16(a)(3). The
2009 Determinations applied only to those individuals identified by the Company
as subject to the Special Master’s mandatory jurisdiction to review and approve
compensation structures and payments, see id., for 2009 and only with respect to
compensation for services provided to AIG for 2009.
          On December 14, 2009, the Special Master requested from each remaining
Exceptional Assistance Recipient, including AIG, certain data and documentary
information necessary to facilitate the Special Master’s review of the Company’s
2010 compensation structures. The request required AIG to submit data describing
its proposed compensation structures, and the payments that would result from
the proposals, concerning each Covered Employee.
          In addition, the Rule authorizes the Special Master to request
information from an Exceptional Assistance Recipient “under such procedures as
the Special Master may determine.” Id. § 30.16(d). AIG was required to submit
competitive market data indicating how the amounts payable under AIG’s proposed
compensation structures relate to the amounts paid to persons in similar
positions or roles at similar entities. AIG was also required to submit a range
of documentation, including information related to proposed performance metrics,
internal policies designed to curb excessive risk, and certain previously
existing compensation plans and agreements.
          AIG submitted this information to the Office of the Special Master on
January 15, 2010. Following a preliminary review of the submission, on
February 2, 2010, the Special Master determined that AIG’s submission was
substantially complete for purposes of the Rule. Id. § 30.16(a)(3)(i). The
Office of the Special Master then commenced a formal review of AIG’s proposed
compensation structures for the Covered Employees. The Rule provides that the
Special Master is required to issue a compensation determination within 60 days
of receipt of a substantially complete submission. Id.
          The Office of the Special Master’s review of the Company’s proposals
was aided by analysis from a number of internal and external sources, including:

  •   Treasury personnel detailed to the Office of the Special Master, including
executive compensation specialists with significant experience in reviewing,
analyzing, designing and administering executive compensation plans, and
attorneys with experience in matters related to executive compensation;     •  
Competitive market data provided by the Company in connection with its
submission to the Office of the Special Master;     •   External information on
comparable compensation structures extracted from the U.S. Mercer Benchmark
Database-Executive; and     •   External information on comparable compensation
structures extracted from Equilar’s ExecutiveInsight database (which includes
information drawn from publicly filed proxy statements) and Equilar’s Top 25
Survey Summary Report (which includes information from a survey on the pay of
highly compensated employees).

          The Special Master considered these sources, in light of the statutory
and regulatory standards described in Part III below, when evaluating the
Company’s proposed compensation structures for the Covered Employees for 2010.

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III. Statutory And Regulatory Standards
          The Rule requires that the Special Master determine for each of the
Covered Employees whether AIG’s proposed compensation structure, including
amounts payable or potentially payable under the compensation structure, “will
or may result in payments that are inconsistent with the purposes of section 111
of EESA or TARP, or are otherwise contrary to the public interest.” 31 C.F.R. §
30.16(a)(3) (as applied to Covered Employees of Exceptional Assistance
Recipients, the “Public Interest Standard”). The Rule requires that the Special
Master consider six principles when making these compensation determinations:

  (1)   Risk. The compensation structure should avoid incentives that encourage
employees to take unnecessary or excessive risks that could threaten the value
of the Exceptional Assistance Recipient, including incentives that reward
employees for short-term or temporary increases in value or performance; or
similar measures that may undercut the long-term value of the Exceptional
Assistance Recipient. Compensation packages should be aligned with sound risk
management. Id. § 30.16(b)(1)(i).     (2)   Taxpayer return. The compensation
structure and amount payable should reflect the need for the Exceptional
Assistance Recipient to remain a competitive enterprise, to retain and recruit
talented employees who will contribute to the recipient’s future success, so
that the Company will ultimately be able to repay its TARP obligations. Id. §
30.16(b)(1)(ii).     (3)   Appropriate allocation. The compensation structure
should appropriately allocate the components of compensation such as salary and
short-term and long-term performance incentives, as well as the extent to which
compensation is provided in cash, equity, or other types of compensation such as
executive pensions, or other benefits, or perquisites, based on the specific
role of the employee and other relevant circumstances, including the nature and
amount of current compensation, deferred compensation, or other compensation and
benefits previously paid or awarded. Id. § 30.16(b)(1)(iii).     (4)  
Performance-based compensation. An appropriate portion of the compensation
should be performance-based over a relevant performance period.
Performance-based compensation should be determined through tailored metrics
that encompass individual performance and/or the performance of the Exceptional
Assistance Recipient or a relevant business unit taking into consideration
specific business objectives. Performance metrics may relate to employee
compliance with relevant corporate policies. In addition, the likelihood of
meeting the performance metrics should not be so great that the arrangement
fails to provide an adequate incentive for the employee to perform, and
performance metrics should be measurable, enforceable, and actually enforced if
not met. Id. § 30.16(b)(1)(iv).     (5)   Comparable structures and payments.
The compensation structure, and amounts payable where applicable, should be
consistent with, and not excessive taking into account, compensation structures
and amounts for persons in similar positions or roles at similar entities that
are similarly situated, including, as applicable, entities competing in the same
markets and similarly situated entities that are financially distressed or that
are contemplating or undergoing reorganization. Id. § 30.16(b)(1)(v).

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  (6)   Employee contribution to TARP recipient value. The compensation
structure and amount payable should reflect the current or prospective
contributions of an employee to the value of the Exceptional Assistance
Recipient, taking into account multiple factors such as revenue production,
specific expertise, compliance with company policy and regulation (including
risk management), and corporate leadership, as well as the role the employee may
have had with respect to any change in the financial health or competitive
position of the recipient. Id. § 30.16(b)(1)(vi).

          The Rule provides that the Special Master shall have discretion to
determine the appropriate weight or relevance of a particular principle
depending on the facts and circumstances surrounding the compensation structure
or payment for a particular employee. Id. § 30.16(b). To the extent two or more
principles may appear inconsistent in a particular situation, the Rule requires
that the Special Master exercise his discretion in determining the relative
weight to be accorded to each principle. Id.
          The Rule provides that the Special Master may, in the course of
applying these principles, take into account other compensation structures and
other compensation earned, accrued, or paid, including compensation and
compensation structures that are not subject to the restrictions of section 111
of EESA. For example, the Special Master may consider payments obligated to be
made by the Company pursuant to certain legally binding rights under valid
written employment contracts entered into prior to enactment of the statute and
the accompanying Rule. Id. § 30.16(a)(3).
IV. Compensation Structures And Payments
A. AIG Proposals
          AIG has provided the Office of the Special Master with detailed
information concerning its proposed 2010 compensation structures for the Covered
Employees, including amounts proposed to be paid under the compensation
structure for each Covered Employee (the “Proposed Structures”).
          AIG supported its proposal with detailed assessments of each Covered
Employee’s tenure and responsibilities at the Company and historical
compensation structure. The submission also included market data that, according
to the Company, indicated that the amounts potentially payable to each employee
were comparable to the compensation payable to persons in similar positions or
roles at a “peer group” of entities selected by the Company. Of the 13 employees
listed as Covered Employees for 2009, 8 remain on the list of Covered Employees
for 2010, and 14 employees are new entrants to the group.
          1. AIG Corporate and Operating Units
          Each of the five Senior Executive Officers and 11 of the Most Highly
Compensated Employees serve in either AIG’s corporate offices or as a senior
executive of an AIG subsidiary other than AIG Financial Products (“AIGFP”). The
Proposed Structures for employees in this group generally included cash salaries
of $500,000 or more, and stock salary and long-term restricted stock with terms
and conditions consistent with the 2009 Determinations.

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               a. Cash Salary and Cash “Retention” Awards
          AIG proposed that employees new to the Covered Employee group
generally continue to receive cash salaries at the rates paid to them in 2009,
with the proposed rates ranging from $350,000 to $1,500,000. For 3 of the 4
corporate employees remaining in the Covered Employee group from 2009, the
Company proposed raising cash salaries. (The exception was the Chief Executive
Officer.) The proposed raises were substantial and would result in 100% to 140%
increases over the cash salaries approved by the Special Master in 2009. AIG’s
submission argued that the proposed cash salaries could be justified by
reference to the compensation of persons in similar positions or roles at
similar entities.
          AIG has indicated that it intends to pay “retention” awards to 8
Covered Employees in this group in 2010. The “retention” awards are paid under
agreements asserted to provide legally binding rights under valid written
employee contracts, see 31 C.F.R. § 30.10(e)(2), that was thus not subject to
the review of the Special Master.
               b. Stock Salary
          AIG proposed stock salaries in amounts ranging from $200,000 to
$7,740,000 for corporate and operating unit employees who are new to the Covered
Employee group. For 3 of the 4 corporate employees remaining in the Covered
Employee group from 2009, the Company proposed raising stock salaries. The
proposed raises would result in 65% to 87% increases over the stock salaries
approved by the Special Master in 2009. As required by the Rule, the stock units
proposed to be used for stock salary would be fully vested upon grant.
          Consistent with the 2009 Determinations, AIG proposed that stock
salary granted to Covered Employees in this group would only be redeemable in
three equal, annual installments beginning on the second anniversary of grant,
with each installment redeemable one year earlier if AIG repays its federal
obligations.
               c. Annual Long-Term Incentive Awards
          AIG proposed that most Covered Employees would be eligible to receive
annual long-term incentive awards representing approximately 10% their total
2010 compensation, payable in long-term restricted stock units that generally
would vest only if the Covered Employee remains employed by the Company on the
third anniversary of the grant date. As required by the Rule, these awards would
be paid only in 25% installments for each 25% of AIG’s TARP obligations that are
repaid.
               d. “Other” Compensation and Perquisites
          AIG proposed payments of “other” compensation, as well as perquisites,
to the Covered Employees. These proposed payments varied in value.
               e. Non-Qualified Deferred Compensation
          AIG proposed that the Special Master revisit the requirement in the
2009 Determinations that Covered Employees must not accrue additional amounts
under “non-qualified deferred compensation” plans for 2010 (with the exception
of employee-funded elective deferrals).

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     2. AIG Financial Products
     Six of the Most Highly Compensated Employees for 2010 are executives of
AIGFP. The Proposed Structures for employees in this group consisted of cash
salaries of $500,000 and stock salaries ranging from $1,000,000 to $3,000,000.
Unlike the proposed stock salary for corporate and operating unit employees, the
stock salary proposed for AIGFP Covered Employees would be redeemable on the
first anniversary of grant. No long-term restricted stock was proposed for these
Covered Employees, in light of the Company’s intention to wind down AIGFP’s
operations.
     In addition, each of the AIGFP Covered Employees has received a cash
“retention” award in 2010 under an agreement asserted to provide a legally
binding right under a valid written employee contract, see id., that thus was
not subject to the approval of the Special Master.
B. Determinations of the Special Master
     The Special Master has reviewed the Proposed Structures in detail by
application of the principles set forth in the Rule and described in Part III
above. The Special Master’s review also made use of the resources described in
Part II. In light of this review, the Special Master has determined that the
principles established for 2009, which reflect the Public Interest Standard and
are set forth in the 2009 Determinations, must continue to govern compensation
in 2010.
     After reviewing the Proposed Structures, the Special Master has concluded
that they are in some respects consistent with the general principles
established in the 2009 Determinations; however, certain aspects of the Proposed
Structures and amounts potentially payable under the Proposed Structures require
modification to ensure that they are consistent with the Public Interest
Standard.
     The Special Master has determined, in light of the considerations that
follow, that the compensation structures described in Exhibits I and II to this
Determination Memorandum will not, by virtue of either their structural design
or the amounts potentially payable under them, result in payments inconsistent
with the Public Interest Standard.
     1. AIG Corporate and Operating Units
          a. Cash Salary and Cash “Retention” Awards
     The Special Master reviewed AIG’s proposed cash salaries in light of the
principle that compensation structures should generally be comparable to
“compensation structures and amounts for persons in similar positions or roles
at similar entities,” 31 C.F.R. § 30.16(b)(1)(v). Based in part upon this
principle, the Special Master concluded in 2009 that cash salaries generally
should not target a level above the 50th percentile as compared to persons in
similar positions or roles at similar entities, because such levels of cash
salaries balance the need to attract and retain talent with the need for
compensation structures that reflect the circumstances of Exceptional Assistance
Recipients.
     The Special Master also reviewed AIG’s proposed cash salaries in light of
the principle that compensation structures should be “performance-based over a
relevant performance period,”

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id. § 30.16(b)(1)(iv). Based in part upon this principle, the 2009
Determinations concluded that, other than in exceptional cases for good cause
shown, a Covered Employee’s cash salary should not exceed $500,000.
     In addition, the Special Master may take into account compensation
structures, such as legally binding rights under valid employment contracts,
that are not subject to review by the Special Master. Id. § 30.16(a)(3). Of the
employees in this group, eight are asserted to be entitled to substantial cash
payments in 2010 pursuant to previously existing “retention” awards. As noted in
the 2009 Determinations, similar “retention” awards at other Exceptional
Assistance Recipients were amended to provide compensation in a manner
consistent with the Public Interest Standard; however, discussions with AIG
officials have not resulted in agreements to restructure these arrangements.
Instead, for each Covered Employee with a cash “retention” award payable in
2010, the Special Master has considered the “retention” award when assessing the
cash salary AIG proposed for that employee.
     Accordingly, the Special Master has determined that the proposed cash
salaries would not be consistent with the Public Interest Standard because they
generally exceeded $500,000 and do not appropriately consider the amounts
payable in 2010 to Covered Employees under previously existing cash “retention”
awards. The cash salaries that the Special Master has determined to be
consistent with the Public Interest Standard for these employees are described
in Exhibits I and II.
          b. Stock Salary
     The Special Master reviewed the amount of stock salary AIG proposed to pay
these Covered Employees in light of the principles that compensation structures
should generally be comparable to “compensation structures and amounts for
persons in similar positions or roles at similar entities,” id. §
30.16(b)(1)(v), and that a “compensation structure, and amount payable...should
reflect the current or prospective contributions of an employee to the value of
the [Company],” id. § 30.16(b)(1)(vi). The Special Master found that the amounts
of stock salary proposed by AIG were excessive in comparison to payments
provided to persons in similar positions or roles at similar entities, and that
such payments would be inconsistent with the Public Interest Standard. The stock
salaries that the Special Master has determined are consistent with the Public
Interest Standard for such employees for 2010 are set forth in Exhibit I.
     In addition, the Special Master reviewed AIG’s proposed stock salary in
light of the principle that AIG must be able to maintain and attract the
necessary employees to remain competitive in the marketplace. See id. §
30.16(b)(1)(ii). Based in part upon this principle, in the 2009 Determinations
the Special Master approved a stock salary structure reflecting the value of a
“basket” of four AIG insurance subsidiaries. Following the 2009 Determinations,
the Special Master also approved the use of common stock for 2009 stock salary.
     Since the 2009 Determinations, AIG has entered into agreement to dispose of
some of the subsidiaries covered by the previously approved “basket.”
Accordingly, for 2010 stock salary, AIG proposed an alternative “basket” with a
structure designed to serve as proxy for the long-term value of the Company. The
“basket” would reflect the value of common stock and so-called “hybrid”
securities that, unlike Treasury’s preferred stock, are traded regularly, and
therefore can be valued in a consistent and transparent manner using market
pricing. In light of

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the principles that compensation structures “should avoid incentives to take
unnecessary or excessive risks,” id. § 30.16(b)(1)(i), and be allocated in a
manner that aligns “the interest of the employee with the interests of
shareholders and taxpayers,” id. § 3016(b)(1)(iii), the Special Master has
determined that the payment of stock salary designed to serve as a proxy for the
long-term value of the Company. The terms and conditions of the “basket” units
will be determined by AIG subject to the approval of the Office of the Special
Master.1 The units are described in further detail in Exhibits I and II.
     Finally, the Special Master reviewed the structure of AlG’s proposal for
stock salary in light of the principle that compensation structures should align
performance incentives with long-term value creation rather than short-term
profits. See id. § 30.16(b)(1)(i). In light of this principle, the 2009
Determinations concluded that stock salary may only be redeemable in three
equal, annual installments beginning on the second anniversary of grant, with
each installment redeemable one year earlier in the event AlG repays its federal
obligations. The Proposed Structures were consistent with this requirement. AlG
has informed the Office of the Special Master that the Company completed a
corporate transaction that resulted in the repayment of approximately
$568 million to the Federal Reserve Bank of New York. Accordingly, upon
certification of that repayment by AlG’s compensation committee, each redemption
date of 2009 and 2010 stock salary may be accelerated by one year.2

  c.   Annual Long-Term Incentive Awards

     The Special Master reviewed AIG’s proposed annual long-term incentive
awards in light of the principle that performance-based compensation should be
payable “over a relevant performance period,” id. Based in part upon this
principle, the 2009 Determinations require long-term incentives to be paid in
the form of long-term restricted stock, and permit such awards
 

1   The Covered Employees generally may not be paid a “bonus,” or receive
payments pursuant to an “incentive plan,” except in limited circumstances
prescribed by the Rule. The provisions of the Rule addressing compensation in
the form of salary paid in property (such as stock) indicate that such payments
will not constitute an “incentive plan” for purposes of the Rule if the payments
are made pursuant to “an arrangement under which an employee receives a
restricted stock unit that is analogous to TARP recipient stock,” 31 C.F.R. §
30.1. Under the Rule, “a unit is analogous to stock if the unit is based upon
stock of the TARP recipient...and the term ‘TARP recipient stock’ with respect
to a particular employee recipient means the stock of a corporation...that is an
‘eligible issuer of service recipient stock’” for purposes of certain federal
taxation regulations, id. The Rule also provides that “[t]he Special Master
shall have responsibility for interpreting” the Rule. Id. § 30.16(a)(1). AIG’s
proposed “basket” units comprising common stock and debt securities are designed
to approximate the long-term value of the Company, and thus to align employees
incentives with the taxpayer, while avoiding incentives for excessive risk
taking. Accordingly, under these limited, unique circumstances, and without
determining whether the “basket” units comprise “stock of a corporation...that
is an ‘eligible issuer of service recipient stock’” under the Rule, the Special
Master has concluded that AIG’s proposed units constitute “restricted stock
unit[s] that are analogous to TARP recipient stock” for purposes of the Rule.
Id. § 30.1.   2   The terms and conditions of stock salary and long-term
restricted stock proposed for the Chief Executive Officer are described in the
August 16, 2009, Letter Agreement with Robert H. Benmosche pursuant to which
Mr. Benmosche was appointed Chief Executive Officer of AIG. The Special Master
initially determined that the compensation structure under the Letter Agreement
was consistent with the Public Interest Standard on October 2, 2009. See Letter
to Compensation and Management Resources Committee, American International
Group, Oct. 2, 2009, available at
http://www.financialstability.gov/docs/RobertBenmoscheDeterminationLetter.pdf.
For the reasons provided therein, the Special Master has affirmed that
compensation potentially payable to Mr. Benmosche in 2010 under his Letter
Agreement and as described in Exhibit I is consistent with the Public Interest
Standard.

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to be paid if, and only if, objective performance metrics are achieved and the
employee continues to provide services to the company for three years following
the date of grant.
     The structure of AIG’s proposed annual long-term incentive awards is
generally consistent with the 2009 Determinations. Under the Proposed
Structures, annual long-term incentive awards for 2010 will be payable only upon
the achievement of specified, objective performance criteria to be provided to
the Office of the Special Master and the employee continues to provide services
to the Company for three years following the date of grant. In addition, as
required by the Rule, these awards may only be redeemed in 25% installments for
each 25% of AIG’s TARP obligations that are repaid.
     The Special Master also reviewed the target amounts of annual long-term
incentive awards AIG proposed for the Covered Employees in this group in light
of the principle that an “appropriate portion of the compensation should be
performance-based,” id. § 30.16(b)(1)(iv), and based on “performance metrics
[that are] measurable, enforceable, and actually enforced if not met.” Id. The
Proposed Structures failed to meet these principles because they generally
allocated no more than 10% of a Covered Employee’s compensation to long-term
restricted stock based on the achievement of performance measures. As described
in Exhibits I and II, the structures the Special Master has determined to be
consistent with the Public Interest Standard include more substantial
allocations to annual long-term incentive awards payable only upon the
achievement of specified, objective performance criteria to be developed and
reviewed in consultation with the Office of the Special Master.
     Finally, the Company requested that different vesting terms apply in the
case of employees who provide two years of service after the grant of an
incentive—the minimum service period required by the Rule—but retire prior to
providing three years of service, which is the length of service required by the
2009 Determinations. The Special Master has concluded that the Company’s
succession planning and the timing of individual employees’ retirement dates
should not be unduly dependent on compensation structures in light of the
principles that compensation structures and the amounts payable thereunder
should reflect “the current or prospective contributions of an employee to the
value of the TARP recipient” and “the need for the TARP recipient to remain a
competitive enterprise, to retain ... talented employees who will contribute to
the TARP recipient’s future success.” Id. § 30.16(b)(1). Accordingly, for the
foregoing reasons and the reasons provided in the 2009 Determinations, the
Special Master has determined that the long-term incentive awards described in
Exhibits I and II will not result in payments that would be inconsistent with
the Public Interest Standard.
          d. “Other” Compensation and Perquisites
     The 2009 Determinations generally require that perquisites and “other”
compensation provided to a Covered Employee be limited to $25,000 on an annual
basis, and the Proposed Structures are consistent with this requirement. For the
reasons provided in the 2009 Determinations, and as described in Exhibit II, any
exceptions to this limitation will require that the Company provide to the
Office of the Special Master an independent justification for the payment that
is satisfactory to the Special Master.

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          e. Non-Qualified Deferred Compensation
     For the reasons provided in the 2009 Determinations, Covered Employees will
not accrue in 2010 additional amounts under supplemental executive retirement
plans and other “non-qualified deferred compensation” plans, as described in
Exhibit II.
          f. Severance Plans
     For the reasons provided in the 2009 Determinations, the Company must
ensure that 2010 compensation structures for these employees do not result in an
increase in the amounts payable pursuant to these arrangements.
     2. AIG Financial Products
     In the 2009 Determinations, the Special Master emphasized the importance of
the ongoing discussions with the Company regarding the full satisfaction of the
pledge by AIGFP employees to return $45 million of the cash “retention” payments
they received in 2009. Because of the unresolved nature of those discussions,
the Special Master determined that no payments of additional 2009 compensation
to the applicable employees, other than continuation of cash salaries, would be
consistent with the Public Interest Standard.
     Each of the AIGFP Covered Employees received another substantial cash
“retention” payment in 2010. In light of these “retention” payments, which may
be taken into account in determining 2010 compensation structures, see id. §
30.16(a)(3)(i), the Special Master has concluded that the proposed $500,000 cash
base salaries for AIGFP employees would generally not be consistent with the
Public Interest Standard. Accordingly, the cash salaries for AIGFP Covered
Employees set forth on Exhibit I are frozen at the levels paid at the conclusion
of fiscal year 2008, per the 2009 Determinations, with one exception where a
$450,000 salary has been approved for an employee in light of his critical role.
     Each of the AIGFP Covered Employees also pledged to participate in the
$45 million repayment described above. AIG has informed the Office of the
Special Master that, as of the date hereof, it has received, offset or withheld
at least $45 million. The Special Master has concluded that, conditioned upon
certification by the chair of the Company’s compensation committee that at least
$45 million of “retention” payments has been received, offset or withheld by the
Company, the payment of additional, non-cash compensation to AIGFP Covered
Employees for service provided in 2010 will not be inconsistent with the Public
Interest Standard, so long as the compensation otherwise satisfies the
principles set forth in the Rule and described in Part III. Accordingly, the
Special Master reviewed the amounts and structure of stock compensation proposed
for this group of employees in light of those principles.
     AIG proposed that these Covered Employees be granted stock salary that
would be redeemable on the first anniversary of the grant date. AIG argued that
the shorter redemption period would be appropriate in light of the anticipated
wind down of AIGFP. Stock salary, however, is required by the Rule to be fully
vested at grant, so the departure of an employee as the result of reductions in
force in connection with the wind-down will not result in forfeiture of earned
stock salary. In addition, the services provided by AIGFP Covered Employees in
2010 have the potential to continue affecting the value of AIG long after the
employees’ departure.

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Thus, redemption of an AIGFP Covered Employee’s stock salary on the first
anniversary of grant would result in compensation that is not “performance-based
over a relevant performance period.” Id. § 30.16(b)(1)(iv). Accordingly, the
stock salary that the Special Master has determined to be consistent with the
Public Interest Standard for AIGFP Covered Employees has the same structure, as
described in Exhibits I and II, as the stock salary provided to Covered
Employees at the Company’s corporate and operating units: it may only be
redeemable in three equal, annual installments beginning on the second
anniversary of grant, with each installment redeemable one year earlier if AIG
repays its federal obligations.
     3. Departed Employees
     Three employees who would have been Covered Employees had they remained
employed are no longer employed by the Company. With respect to those employees,
the Special Master has determined that the payment of stock salaries and cash
salaries at the rates in effect on January 1, 2010, through the date of the
termination of employment, and payment of up to $25,000 in perquisites and
“other” compensation are consistent with the Public Interest Standard. No other
payments to these employees of any kind would be consistent with the Public
Interest Standard. Any exceptions to this limitation will require that the
Company provide to the Office of the Special Master an independent justification
for the payment that is satisfactory to the Special Master.3
V. Corporate Governance
     As noted in Part III above, the Rule requires the Special Master to
consider the extent to which compensation structures are “performance-based over
a relevant performance period,” 31 C.F.R. §30.16(b)(1)(iv). In light of the
importance of this principle, the Special Master required as part of the 2009
Determinations that AIG take certain corporate governance steps to ensure that
the compensation structures for the Covered Employees, and the amounts payable
or potentially payable under those structures, are consistent with the Public
Interest Standard.
     The Special Master has determined that these same corporate governance
requirements, which are detailed in Section V of the 2009 Determinations, must
continue to apply in 2010. Among other requirements, AIG must:

  •   Ensure that employees are prohibited from engaging in any derivative or
similar transaction with respect to AIG stock that would undermine the long-term
performance incentives created by the compensation structures set forth in
Exhibits I and II.     •   Maintain a compensation committee comprised
exclusively of independent directors, which must discuss, evaluate, and review
with AIG’s senior risk officers any risks that could threaten the value of AIG.
Id. § 30.4; id. § 30.5.

 

3   AIG has informed the Office of the Special Master that one of the departed
employees was stationed overseas. With respect to that employee, the Special
Master has determined that payments in connection with his repatriation, limited
to those expressly contemplated by the letter agreement confirming his overseas
assignment, are consistent with the Public Interest Standard.

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  •   Ensure that the compensation committee discloses to Treasury an annual
narrative description of whether AIG, its board of directors, or the committee
has engaged a compensation consultant during the past three years; and, if so,
the types of services provided by the compensation consultant or any affiliate,
including any “benchmarking” or comparisons employed to identify certain
percentile levels of pay. Id. § 30.11(c).     •   Provide to Treasury an annual
disclosure of any perquisite whose total value for AIG’s fiscal year exceeds
$25,000 for each of the Covered Employees, as well as a narrative description of
the amount and nature of these perquisites, the recipient of these perquisites
and a justification for offering these perquisites (including a justification
for offering the perquisite, and not only for offering the perquisite with a
value that exceeds $25,000). Id. § 30.11(b).     •   Ensure that any incentive
award paid to a Covered Employee is subject to a clawback if the award was based
on materially inaccurate financial statements (which includes, but is not
limited to, statements of earnings, revenues, or gains) or any other materially
inaccurate performance metric criteria. AIG must exercise its clawback rights
except to the extent that it is unreasonable to do so. Id. § 30.8.     •   AIG
was required to adopt an excessive or luxury expenditures policy, provide that
policy to the Treasury, and post it on AIG’s website. If AIG’s board of
directors makes any material amendments to this policy, within ninety days of
the adoption of the amended policy, the board of directors must provide the
amended policy to Treasury and post the amended policy on its Internet website.
Id. § 30.12.     •   Except as explicitly permitted under the Rule, AIG is
prohibited from providing (formally or informally) tax gross-ups to any of the
Covered Employees. Id. § 30.11(d).     •   AIG’s chief executive officer and
chief financial officer must provide written certification of the Company’s
compliance with the various requirements of section 111 of EESA. The precise
nature of the required certification is identified in the Rule. Id. § 30.15
Appx. B.

VI. Conclusion
     The Special Master has reviewed the Proposed Structures for the Covered
Employees for 2010 in light of the principles described in the 2009
Determinations, which in turn reflect the Public Interest Standard. On the basis
of that review, the Special Master has determined that the Proposed Structures
submitted by AIG are to some extent consistent with the 2009 Determinations but
require certain modifications in order to meet the Public Interest Standard.
     The Special Master has separately reviewed the compensation structures set
forth in Exhibits I and II in light of the principles set forth at 31 C.F.R. §
30. 16(b). Pursuant to the authority vested in the Special Master by the Rule,
and in accordance with Section 30.16(a)(3) thereof, the Special Master hereby
determines that the compensation structures set forth in Exhibits I and II,
including the amounts payable or potentially payable under such compensation

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structures, will not result in payments that are inconsistent with the purposes
of section 111 of EESA or TARP, and will not otherwise be contrary to the public
interest.
     Pursuant to the Interim Final Rule, AIG may, within 30 days of the date
hereof, request in writing that the Special Master reconsider the determinations
set forth in this Determination Memorandum. The request for reconsideration must
specify a factual error or relevant new information not previously considered,
and must demonstrate that such error or lack of information resulted in a
material error in the initial determinations. If AIG does not request
reconsideration within 30 days, the determinations set forth herein will be
treated as final determinations. ld. § 30.16(c)(l).
     The foregoing determinations are limited to the compensation structures and
employees described in Exhibits I and II, and shall not be relied upon with
respect to any other employee. The determinations are limited to the authority
vested in the Special Master by Section 30.16(a)(3)(i) of the Rule, and shall
not constitute, or be construed to constitute, the judgment of the Office of the
Special Master or Treasury with respect to the compliance of any compensation
structure with any other provision of the Rule. Moreover, this Determination
Memorandum has relied upon, and is qualified in its entirety by, the accuracy of
the materials submitted by the Company to the Office of the Special Master, and
the absence of any material misstatement or omission in such materials.
     Finally, the foregoing determinations are limited to the compensation
structures described herein, and no further compensation of any kind payable to
any Covered Employee without the prior approval of the Special Master would be
consistent with the Public Interest Standard.

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EXHIBIT I
COVERED EMPLOYEES
2010 Compensation
Company Name: American International Group, Inc.

                                              Stock Salary   Long-Term
Restricted Stock                 (Performance based: The   (Performance based:
Awarded                 stock vests at grant and is   based on achievement of  
              redeemable in three equal,   objective performance goals.   Total
Direct Compensation             annual installments   Generally vests after 3
years of   (Cash salary + stock             beginning on the 2nd   service.
Transferability dependent   salary + long-term Employee ID   Cash Salary  
anniversary of grant. )   on TARP repayment.)   restricted stock.)
1
  $ 3,000,000     $ 4,000,000     $ 3,500,000     $ 10,500,000  
133
  $ 450,000     $ 4,062,500     $ 1,500,000     $ 6,012,500  
134
  $ 700,000     $ 3,050,000     $ 1,250,000     $ 5,000,000  
145
  $ 177,799     $ 3,322,201     $ 0     $ 3,500,000  
147
  $ 241,933     $ 758,067     $ 0     $ 1,000,000  
157
  $ 125,000     $ 3,468,750     $ 0     $ 3,593,750  
163
  $ 495,000     $ 4,485,000     $ 1,020,000     $ 6,000,000  
182
  $ 450,000     $ 3,062,500     $ 0     $ 3,512,500  
186
  $ 450,000     $ 1,437,500     $ 625,000     $ 2,512,500  
188
  $ 100,000     $ 3,500,000     $ 0     $ 3,600,000  
192
  $ 700,000     $ 2,000,000     $ 0     $ 2,700,000  
196
  $ 495,000     $ 3,731,250     $ 1,375,000     $ 5,601,250  
206
  $ 700,000     $ 5,000,000     $ 1,900,000     $ 7,600,000  
217
  $ 1,500,000     $ 2,520,000     $ 1,980,000     $ 6,000,000  
236
  $ 475,000     $ 2,156,250     $ 875,000     $ 3,506,250  
237
  $ 495,000     $ 3,656,250     $ 850,000     $ 5,001,250  
243
  $ 500,000     $ 1,300,000     $ 0     $ 1,800,000  
261
  $ 475,000     $ 4,568,750     $ 0     $ 5,043,750  
267
  $ 495,000     $ 5,149,000     $ 1,156,000     $ 6,800,000  
534
  $ 312,500     $ 0     $ 0     $ 312,500  
1056
  $ 475,000     $ 2,967,932     $ 854,000     $ 4,296,932  
1057
  $ 442,874     $ 2,117,126     $ 640,000     $ 3,200,000  

Comparison of 2010 Compensation to Prior Year Compensation
• Overall: Overall cash decreased $22.2M or 63% and total direct compensation
increased $1.9M or 2%.
• The 4 corporate and operating unit executives remaining in the Top 25 from
2009: Cash salaries increased $0.5M or 12% and total direct compensation
increased $3.3M or 12%.
• The 12 corporate and operating executives new to the Top 25 in 2010: Overall
cash compensation decreased $23M or 77% and total direct compensation decreased
$17.2M or 25% from 2009.
• The 6 Financial Products executives: Cash base salaries are frozen at fiscal
year 2008 levels, with one exception who remains below $500,000; 91% of total
compensation is now delivered over 4 years and tied to company performance
versus 0% in 2009.
 
Note 1: Amounts reflected in this Exhibit do not include amounts the Company has
asserted to be payable pursuant to legally binding rights under valid employment
contracts, see 31 C.F.R § 30.10(e)(2).
Note 2: The terms of stock salary and any long-term restricted stock delivered
to Employee 1, the CEO, are provided in a letter agreement the Special Master
approved in a determination dated October 2, 2009. See supra Determination
Memorandum note 1. Stock salary may not be redeemed until the fifth anniversary
of the date it is earned. Long-term restricted stock generally will be forfeited
if the CEO does not serve for at least two years after the grant date, and
cannot be redeemed until AIG repays its TARP obligations.
Note 3: The total number of Covered Employees may be less than 25 because of
separations from service since January 1, 2010.

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EXHIBIT II
TERMS AND CONDITIONS OF PAYMENTS AND STRUCTURES
CONSISTENT WITH THE PUBLIC INTEREST STANDARD
     The following general terms and conditions shall govern the compensation
structures described in Exhibit I. The Special Master’s determination that those
structures are consistent with the Public Interest Standard is qualified in its
entirety by the Company’s adherence to these terms and conditions.

•   Salary payments. Cash and stock base salaries reflect the annual rate for
the employee and are effective as of January 1, 2010, and in the case of stock
salary are payable on a nunc pro tunc basis from that date. To the extent the
Special Master’s determinations for 2010 reduce an employee’s previous cash or
stock salary rate, payments in excess of that rate prior to the date hereof must
be offset by reductions to prospective 2010 cash salary payments or to any stock
salary payable with respect to 2010.

•   Stock compensation generally. For purposes of the Determination Memorandum,
“stock” compensation includes common stock and stock units (or, for stock salary
only, the securities referenced by the “basket” described below).
Notwithstanding any transferability restrictions applicable to any stock
compensation described in the Determination Memorandum, (1) an amount of stock
sufficient to cover an employee’s tax withholding obligations may become
immediately transferable to the extent necessary to satisfy the employee’s
obligations, and (2) to the extent permitted by the Rule, stock may become
immediately transferable upon an employee’s death or separation from service
resulting from disability, as defined in the Company’s broad-based long-term
disability plan.

•   Stock salary. Stock salary must be determined as a dollar amount through the
date salary is earned, be accrued at the same time or times as the salary would
otherwise be paid in cash, and vest immediately upon grant, with the number of
shares based on the fair market value on the date of award. Stock granted as
stock salary may only be redeemed in three equal, annual installments as
described in the Determination Memorandum. Whether a nunc pro tunc grant or
payment that is labeled stock salary is considered salary or a bonus for
purposes of the Rule is determined based on all the facts and circumstances. As
described in Part IV, stock salary may be granted in the form of stock units
reflecting the value of a “basket” of AIG common stock and other securities. The
terms and conditions of these “basket” units will be determined by AIG subject
to the approval of the Office of the Special Master.

•   Long-term restricted stock. Long-term restricted stock may only be granted
upon the achievement of objective performance criteria developed and reviewed in
consultation with the Office of the Special Master. The compensation committee
must certify (1) the achievement of such criteria, and (2) that the grant of
incentives is appropriate in light of AIG’s overall circumstances at the time.
Such stock must be forfeited unless conditioned upon the employee’s continued
employment through the third anniversary of grant, unless a termination of
employment results from death or disability; provided, however, that all or a
portion of such stock (or similar stock granted with respect to 2009 service)
may, for good cause certified by the Company’s compensation committee, continue
to vest if the employee retires on or after the second anniversary of the grant
date. The term “retirement” must meet an objective standard established in
consultation with the Office of the Special Master.

•   Other compensation and perquisites. No more than $25,000 in total other
compensation and perquisites may be provided to any Covered Employee, absent
exceptional circumstances for good cause shown, as defined by pertinent SEC
regulations.

•   Supplemental executive retirement plans and non-qualified deferred
compensation plans. No amounts may be accrued under supplemental executive
retirement plans, and no Company contributions may be made to other
“non-qualified deferred compensation” plans, as defined by pertinent SEC
regulations, for 2010. For the avoidance of doubt, neither the foregoing
limitation nor the corresponding limitation in the 2009 Determinations
(1) applies to employee-funded elective deferral arrangements, or (2) precludes
continuing recognition of age and service credit for Company employees for the
purposes of vesting in previously accrued benefits under any plans referred to
in this paragraph.

•   Qualified Plans. For the avoidance of doubt, the Special Master has
determined that participation by the Covered Employees in broad-based,
tax-qualified retirement and health and welfare plans is consistent with the
Public Interest Standard, and amounts payable under such plans are not counted
against the $25,000 limit on other compensation and perquisites.

E2