Exhibit 10(109)

 

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DEPARTMENT OF THE TREASURY
Washington, D.C. 20220

 

 

April 8, 2011

 

Jeffrey J. Hurd, Esq.
Senior Vice President —

Human Resources and Communications
American International Group, Inc.
180 Maiden Lane
22nd Floor
New York, NY 10038-4925

 

Re:          Proposed Compensation Structures for Certain Executive Officers
and Most Highly Compensated Employees (“Covered Employees 26 — 100”)

 

Dear Mr. Hurd:

 

Pursuant to the Department of the Treasury’s Interim Final Rule on TARP
Standards for Compensation and Corporate Governance (the “Rule”),(1) the Office
of the Special Master has completed its review of the 2011 compensation
submission by American International Group, Inc. (“AIG” or the “Company”), on
behalf of employees who are either executive officers of AIG or one of AIG’s 100
most highly compensated employees, excluding those employees subject to
Section 30.10 of the Rule (“Covered Employees 26 — 100” or “Covered Employees”).

 

The Office of the Special Master’s compensation reviews for Covered Employees 26
— 100 differ from the reviews of AIG’s “top 25” employees, which addressed
individual “amounts payable” to those employees, 31 C.F.R. § 30.16(a)(3)(i). For
Covered Employees 26 — 100, the Rule does not require individual payment
determinations; instead, the Office of the Special Master must determine only
whether the proposed compensation structures “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” (as applied to Covered Employees 26 —
100 of AIG, the “public interest standard”).  Id. § 30.16(a)(3)(ii).

 

On December 11, 2009, and April 16, 2010, the Office of the Special Master
issued determinations relating to compensation structures for AIG’s 2009 and
2010 Covered Employees 26 —100, respectively (the “Prior Determinations”).  The
Prior Determinations were informed by a number of considerations, including each
of the six principles (the “principles”) articulated in the Rule: avoid
incentives to take excessive risk, maximize the company’s ability to repay the
taxpayer, appropriately allocate the components of compensation, use
performance-based compensation, employ pay structures and amounts that are
consistent with those at comparable entities, and base pay on the employee’s

 

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(1)   The Interim Final Rule and all determination letters issued by the Office
of the Special Master are available at www.financialstability.gov (click on
“About Financial Stability”, then click on “Plan”, then scroll down to the
second-to-last link and click on “Executive Compensation Guidance”).

 

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contribution to the value of the TARP recipient enterprise.  Id. § 30.16(b)(1). 
The Office of the Special Master has concluded that these principles must
continue to apply in 2011.

 

In order to apply the principles and ensure that the compensation structures for
AIG’s Covered Employees 26-100 satisfy the public interest standard, the Office
of the Special Master has developed certain terms and conditions relating to the
components and the allocation of compensation for Covered Employees that must be
satisfied.  These terms and conditions emphasize allocating significant portions
of compensation to long-term structures tied to AIG’s overall value, using
structures that are performance-based and easily understood by shareholders, and
protecting the Company’s ability to remain a competitive enterprise and
ultimately repay the taxpayers.

 

The Office of the Special Master has determined that compensation structures
that satisfy the terms and conditions described in Annex A are consistent with
the public interest standard. AIG’s proposed compensation structures, with minor
modifications, are consistent with these terms and conditions, which generally
require that:

 

·      Compensation may be provided in three primary components: cash salary,
stock salary, and incentive compensation.  The amounts and conditions of the
components for each Covered Employee will be determined by AIG’s compensation
committee.

 

·      A significant portion of compensation must be performance-based. Fixed
compensation must be limited to 40% of total direct compensation payable and
consist only of cash salaries and stock salaries at levels sufficient to attract
and retain employees and provide a reasonable level of liquidity.  Cash salaries
should not exceed $500,000 per year, except in exceptional cases for good cause
shown, as certified by the Company’s independent compensation committee.

 

·      Compensation must emphasize long-term results. Payment and
transferability of at least 50% of any incentive payment to a Covered Employee
must be deferred for at least three years. In addition, at least 50% of all
incentives must be in the form of equity in the Company.  Finally, at least 50%
of all cash incentive awards must be deferred for a minimum period of one year.

 

·      Incentive payments may be made if—and only if—the payments are
appropriate in light of AIG’s overall circumstances and the particular Covered
Employee achieves objective performance metrics.  The total value of all
incentive compensation payments cannot exceed a specified percentage of the
company’s eligible earnings, to be determined by the compensation committee.
Incentive payments must be subject to “clawback” if the performance assessment
resulting in the compensation is later discovered to be inaccurate.

 

In addition, compensation structures for Covered Employees 26 — 100 continue to
be subject to the additional limitations on perquisites, severance benefits,
hedging transactions, tax “gross-ups” and supplemental executive retirement
plans described in Annex A.

 

The Office of the Special Master’s determinations are limited to the
compensation structures described in Annex A, and shall not be relied upon with
respect to any other employee. The determinations have relied upon, and are
qualified in their entirety by, the accuracy of the materials submitted by AIG
to the Office of the Special Master, and the absence of any material
misstatement or omission in such materials.  Pursuant to the Rule, AIG may,
within 30 days of the date hereof, request in writing that the Office of the
Special Master reconsider the determinations set forth in Annex A.  If the

 

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Company does not request reconsideration within 30 days, these initial
determinations will be treated as final determinations.  Id.§ 30.16(c)(l).

 

 

Very truly yours,

 

 

 

 

 

/s/ Patricia Geoghegan

 

Patricia Geoghegan

 

Office of the Special Master

 

for TARP Executive Compensation

 

 

Enclosures

 

 

 

cc:

Mitchell D. Schultz

 

 

Jacqueline Aguanno

 

 

Marc R. Trevino, Esq.

 

 

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ANNEX A
APPROVED 2011 COMPENSATION STRUCTURES

 

This Annex sets forth terms and conditions for the 2011 compensation structures
for AIG’s 2011 Covered Employees 26 — 100.  For the avoidance of doubt, if the
compensation structure for a Covered Employee fits within the $500,000 “safe
harbor” exemption set forth in Section 30.16(a)(3)(ii) of the Rule, the Office
of the Special Master’s approval is not required for that employee’s
compensation structure and the terms and conditions specified below do not
apply.  Capitalized terms used in this Annex have the meaning given to them in
the preceding letter.  To the extent that AIG’s proposed structures do not
satisfy the principles and these terms and conditions, AIG must make such
modifications as are necessary to comply with such principles and terms and
conditions.

 

1.             Primary Components of Compensation

 

·      Cash salary.  Covered Employees should not receive cash salaries in
excess of $500,000, other than in exceptional circumstances for good cause
shown. Any such exceptions must be individually certified to the Office of the
Special Master by AIG’s compensation committee, which is composed solely of
independent directors.

 

·      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 or units based on the fair market value on the date of grant. 
Whether a grant or payment that is labeled stock salary is salary or a bonus for
purposes of the Rule is determined based on all the facts and circumstances.

 

·      Incentive compensation.  Under any incentive compensation structure,
payments to a Covered Employee must be conditioned upon achievement of objective
performance criteria (other than continued service), with such achievement to be
assessed and certified by the compensation committee. Performance criteria must
be developed by the compensation committee and may be reviewed by the Office of
the Special Master.  The aggregate amount of incentives paid to Covered
Employees for performance achieved only in 2011 may not exceed a specified
percentage of AIG’s eligible earnings.  The amount and calculation of such
eligible earnings will be determined by the compensation committee and may be
reviewed by the Office of the Special Master.

 

2.             Allocation Rules

 

·      Application of allocation rules.  The allocation rules apply to each
Covered Employee’s 2011 “total direct compensation payable,” which is equal to
the sum of the amounts potentially payable to a Covered Employee (1) in 2011cash
salary, (2) in 2011 stock salary, or (3) under 2011 incentive plans.  For
purposes of these determinations, 2011 incentive plans are plans for which
incentives are earned (a) solely with respect to 2011, and (b) under a
multi-year incentive plan established in 2011.  Compliance with the allocation
rules is to be assessed based on a Covered Employee’s total direct compensation
payable as designed and established in 2011, assuming that the target level of
achievement under each incentive plan is reached.

 

·      Cash Salary and Stock Salary allocation.  Compensation payable as cash
salary and stock salary may constitute no more than 40% of the total direct
compensation payable to each Covered Employee in 2011.

 

·      Incentive allocation.  A minimum of 60% of the total direct compensation
payable to each Covered Employee in 2011 must be allocated to performance-based
incentive awards assuming that the target

 

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level of achievement is reached.  No payment or equity award under a 2011
incentive plan may be made prior to the conclusion of the applicable performance
period.

 

·      Long-term allocation.  Payment and transferability of least 50% of all
performance- based incentive awards must be deferred for at least a three-year
period. Pro rata release of such amounts is permitted, allowing two-thirds of
such amount to become payable and transferable not earlier than the second
anniversary of the date of the award and the last third of such amount to become
payable and transferable on the third anniversary of the award.  In addition, at
least 50% of all performance-based incentive awards payable in the form of cash
may not be paid prior to the first anniversary of grant.

 

·      Equity allocation.  At least 50% of all performance-based incentive
awards must be delivered in the form of equity in the Company.

 

·      Satisfying incentive allocations.  The aggregate 2011 performance-based
incentives actually paid or awarded to each Covered Employee must satisfy the
above long-term and equity allocation requirements.  If several incentive plans
are in existence, this can be achieved either (1) by ensuring that the aggregate
cash paid and equity awarded to a Covered Employee pursuant to each incentive
plan separately satisfies the long-term and equity allocation requirements, or
(2) by having one incentive compensation target package that complies with the
allocation requirements and giving each Covered Employee a “scorecard”
consisting of multiple goals; achievement against those goals would be evaluated
resulting in an overall score, which would determine the percentage of the
target that the Covered Employee had earned.

 

3.             Additional Terms and Conditions

 

·      Stock compensation generally.  For purposes of these determinations,
“stock” compensation includes AIG common stock or common stock units.(2) 
Notwithstanding the transferability restrictions otherwise applicable to any
stock compensation, (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.

 

·      Clawbacks and hedging.  Any incentive payment must be subject to
“clawback” if the payment or the amount thereof was based on materially
inaccurate financial statements (which term includes, but is not limited to,
statements of earnings, revenues, or gains) or any other materially inaccurate
performance metric criteria, or if the Covered Employee is terminated due to
misconduct that occurred during the period the incentive was earned.  In
addition, the compensation structure for each Covered Employee must prohibit the
employee from engaging in any hedging, derivative or similar transaction with
respect to Company stock that would undermine the long-term performance
incentives created by the compensation structures set forth in this Annex.

 

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(2)   In the determination letter dated April 16, 2010, the Office of the
Special Master approved AIG stock compensation payable in the form of long-term
performance units, which reflected the value of AIG common stock and “hybrid”
securities.  By their terms, such long-term performance units would be converted
into common stock 90 days after the date on which at least 75% of the preferred
securities in AIG held by Treasury were converted into common stock.  On
January 14, 2011, Treasury converted all its preferred securities in AIG into
common stock and, as a result, the conversion of the hybrid securities into
common stock is scheduled to occur on April 14, 2011. In light of this scheduled
conversion, the Office of the Special Master has approved AIG’s request to pay
stock compensation in 2011 in the form of common stock or common stock units,
rather than in the form of long-term performance units.

 

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·      Employees entering the “top 25”.  If AIG reasonably concludes that a
Covered Employee may become one of the “top 25” employees in 2012, the
compensation structure for that Covered Employee will be subject to the
following additional terms and conditions to assure compliance with pertinent
statutory and regulatory requirements.  Any payment under a 2009, 2010, or 2011
incentive plan that would be payable to the Covered Employee in cash in the
first quarter of 2012 consistent with the terms of this Annex, or any previous
Annex relating to 2009 or 2010, may be paid on or before December 31, 2011.  In
addition, notwithstanding the other requirements of the related Annex, any
incentive compensation for performance in 2009, 2010, or 2011 may be paid to the
Covered Employee in the form of AIG common stock (but not stock units) that
vests and is delivered on or before December 31, 2011, provided that the
transferability of such stock shall be consistent with the structural principles
of the related Annex.  Finally, notwithstanding the other requirements of this
Annex, up to one-third of the Covered Employee’s “annual compensation” for 2011
may be paid in the form of “long-term restricted stock,” as those terms are
defined in the Rule.  For the avoidance of doubt, all such payments continue to
be subject to the applicable provisions in the related Annex regarding clawbacks
and hedging.

 

·      Severance.  No 2011 compensation structure may establish the right to a
“golden parachute” payment (as defined in the Rule) or permit an increase in the
amount of such a payment under an already-existing arrangement.

 

4.             Other Components of Compensation

 

·      Tax gross-ups.  AIG is prohibited from providing (formally or informally)
tax gross-ups to any of the Covered Employees, in the same manner as the
gross-up prohibition applies to “top 25” employees under the Rule.

 

·      Other compensation and perquisites.  No more than $25,000 in total other
compensation and perquisites, as defined by pertinent SEC regulations, may be
provided to any Covered Employee, absent exceptional circumstances for good
cause shown.  Payments to Covered Employees under expatriate arrangements, not
to exceed $350,000 per employee (excluding “tax equalization agreements” as
defined in the Rule), are excluded from the limitation in the foregoing
sentence.

 

·      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 any Covered Employee for 2011.  For the avoidance of doubt, the
foregoing limitation does not (1) apply to employee-funded elective deferral
arrangements, or (2) preclude continuing recognition of age and service credit
for Company employees for the purpose of vesting in previously accrued benefits
under any plans referred to in this paragraph.

 

·      Qualified plans.  For the avoidance of doubt, the Office of 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 contributed to or payable under
such plans are not counted against the $25,000 limit on other compensation and
perquisites.

 

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