Document:

exv10w2

Exhibit
10.2

SEVERANCE AGREEMENT

     SEVERANCE AGREEMENT (this “Agreement”), dated as of October 19, 2009 (the “Effective Date”),
between Questcor Pharmaceuticals, Inc., a California corporation (the “Company”), and David Young
(“Executive”).

W I T N E S S E T H:

     WHEREAS, Executive is being employed by the Company pursuant to an Offer Letter dated October
15, 2009, and the Company and Executive desire to enter into this Agreement to set forth the terms
on which Executive may be entitled to severance benefits from the Company. The following terms and
conditions supersede anything of the same subject matter provided for in the Offer Letter or any
other agreement entered into prior to the Effective Date.

     NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and
Executive hereby agree as follows:

     1. At-Will Nature of Employment.

          (a) Termination of Employment. The Company may terminate Executive’s employment at
any time with or without Cause effective immediately upon delivery of a Notice of Termination to
Executive. Subject to the immediately following sentence and for purposes of this Agreement only,
“Cause” shall mean with respect to Executive, any of the following: (i) Executive’s material
neglect of assigned duties with the Company or Executive’s failure or refusal to perform assigned
duties with the Company, which continues uncured for thirty (30) days following receipt of written
notice of such deficiency from the Board of Directors of the Company (“Board”) or the Chief
Executive Officer of the Company, specifying the scope and nature of the deficiency; (ii)
Executive’s commission of a felony or fraud; or Executive’s misappropriation of property belonging
to the Company or its affiliates; (iii) Executive’s commission of a misdemeanor or act of
dishonesty, which causes material harm to the Company; (iv) Executive’s engaging in any act of
moral turpitude which causes material harm to the Company; (v) Executive’s breach of the Company’s
trading compliance program or any confidentiality, proprietary information or nondisclosure
agreement with the Company; or (vi) Executive’s working for another company, partnership or other
entity engaged in the pharmaceutical, biotechnology, medical device or other medically related
business, whether as an employee, consultant or director, while an employee of the Company without
the prior written consent of the Board. Any determination of Cause as used herein will be made in
good faith by the Board. A termination by the Company for reasons other than set forth in clauses
(i) through (vi) above, or for no reason at all but not including a termination of Executive’s
employment with the Company as a result of death or Disability, shall be deemed a “Termination
Without Cause.”

          (b) Voluntary Termination by Executive. Executive may voluntarily terminate his
employment with the Company upon 30 days written notice to the Company.

          (c) Termination by Executive for Good Reason. Executive may terminate his employment
with the Company for Good Reason. “Good Reason” shall mean the occurrence, without Executive’s
written consent, of one or more of the following events: (i) the Company reduces Executive’s base
salary by more than 25%, (ii) the Company decreases Executive’s

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annual bonus target percentage to below 40% of base salary, (iii) the Company materially
decreases Executive’s responsibilities, (iv) the Company relocates Executive’s principal place of
work to a location more than fifty (50) miles from the location of Executive’s principal place of
work on the date of this Agreement, or (v) the Company materially breaches the terms of this
Agreement; provided that no such event shall constitute Good Reason hereunder unless (a) Executive
shall have given written notice to the Company of Executive’s intent to resign for Good Reason
within 30 days after Executive becomes aware of the occurrence of any such event (specifying in
detail the nature and scope of the event), (b) such event or occurrence shall not have been cured
within 30 days of the Company’s receipt of such notice, (c) any Termination by Executive for Good
Reason following such 30 day cure period must occur no later than the date that is 30 days
following the expiration of such 30 day cure period. Executive’s Termination for Good Reason shall
be treated as involuntary.

          (d) Notice of Termination. Any termination of Executive’s employment by the Company
or by Executive shall be communicated by a written Notice of Termination addressed to Executive or
the Company, as applicable. Termination may be effective immediately upon communication of such
Notice of Termination. A “Notice of Termination” shall mean a notice stating that Executive’s
employment with the Company has been or will be terminated and the specific provisions of this
Section 1 under which such termination is being effected.

          (e) Payments Upon Termination. Upon termination of Executive’s employment for any
reason, the Company shall pay Executive (i) his Base Salary earned but not yet paid for services
rendered to the Company on or prior to the date on which the Employment Period ends, (ii) any
accrued but unused vacation days, (iii) any incurred but unpaid reimbursable business expenses and
other insurance related reimbursable expenses, and (iv) any amounts required under the Company’s
Employee Stock Purchase Plan (or successor plans). Any reimbursement for expenses payable under
subsection (iii) shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv)
and shall be paid on or before the last day of Executive’s taxable year following the taxable year
in which Executive incurred the expenses; provided, however, Executive’s right to reimbursement for
such amounts shall not be subject to liquidation or exchange for any other benefit.

     2. Payments Upon Certain Terminations Not Involving a Change in Control.

          (a) Termination by the Company Without Cause or Termination by Executive for Good
Reason. In addition to the payments described in Section 1(e) and subject to Section 4 and
Section 5, provided that Executive is in compliance with his obligations under his Proprietary
Information and Inventions Agreement with the Company, in the event Executive’s employment is
terminated by the Company Without Cause or by Executive for Good Reason, the Company shall (i) pay
Executive any annual bonus payable for services rendered in any annual bonus period for the year
which had been completed in its entirety prior to the date on which the Employment Period ends and
that had not previously been paid, provided, however, it is the Company’s intent that any such
annual bonus shall be evaluated by the Board, and if applicable, paid, no later than December 31 of
the calendar year following the calendar year to which such annual bonus relates, (ii) continue to
make Base Salary payments for (A) a period 6 months following such termination of employment if the
termination occurs on or before the third anniversary of the date on which Executive commenced
employment with the Company, or (B) a period 12 months following such termination of employment if
the termination occurs after such third anniversary date (the period of time such payments are
provided, the “Severance Period”), payable over such 6 month or 12 month period, as the case may
be, on the regular payroll dates of the Company in accordance with the Company’s payroll practices
as in effect on such

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termination date, and subject to applicable tax withholding. Such continued Base Salary
payments shall commence upon the first payroll date following the effective date of the Release
Agreement referenced in Section 5, and the first continued Base Salary payment shall cover the
period between the termination date and such payment, provided, however, no amount shall be paid
pursuant to this Section 2(a) unless, on or prior to the fifty-fifth (55th) day following the date
of the Executive’s Separation from Service (as defined in Section 4 below), Executive has executed
an effective Release Agreement and any applicable revocation period has expired. Each installment
payment made pursuant to this Section 2(a)(ii) shall be considered a separate payment for purposes
of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) (including, without
limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)).

          (b) Duty to Mitigate. If Executive is reemployed for at least twenty (20) hours per
week on average at any time after the termination date and before the end of the Severance Period,
Executive shall promptly provide written notice to the Company of such reemployment, and all
further severance compensation payments under this Section 2 shall be decreased by the amount of
the annual compensation received by Executive from the new employer.

     3. Payments Upon Certain Terminations Involving a Change in Control.

          (a) Statement of Intent. The Board recognizes that, as is the case with many publicly
held corporations, the possibility of a change in control of the Company may exist and that the
uncertainty and questions that it may raise among management could result in the departure or
distraction of management personnel to the detriment of the Company and its shareholders.
Accordingly, the Board has decided to reinforce and encourage Executive’s attention and dedication
to Executive’s assigned duties without the distraction arising from the possibility of a change in
control of the Company.

          (b) Accelerated Vesting. Notwithstanding anything to the contrary in the Company’s
1992 Employee Stock Option Plan or its 2006 Equity Incentive Award Plan (the “Option Plans”), in
the event that a Change in Control (as defined in the Option Plans) occurs, and Executive’s
employment with the Company is terminated by the Company Without Cause or by Executive for Good
Reason at any time within the three (3) month period before the date of such Change in Control or
during the twelve (12) month period following the date of such Change in Control, one-hundred
percent (100%) of the then-unvested shares of Questcor’s common stock subject to each of
Executive’s outstanding stock options and one-hundred percent (100%) of Executive’s restricted
shares subject to vesting will become immediately vested and exercisable on the date of such
termination.

          (c) Cash Severance Upon Termination Without Cause or for Good Reason. Subject to
Section 4 below, in the event a Change in Control occurs which is also a Cash Severance Change in
Control (as defined below), and Executive’s employment with the Company is terminated by the
Company Without Cause or by Executive for Good Reason at any time within the three (3) month period
before the date of such Cash Severance Change in Control or during the twelve (12) month period
following the date of such Cash Severance Change in Control, Executive will receive severance
compensation equal to the sum of (i) an amount equal to his highest Base Salary in the calendar
year in which the Cash Severance Change in Control occurs, plus (ii) an amount equal to his target
bonus as established by the Board or its Compensation Committee for the year during which the
termination takes place (or if such target bonus has not yet been established, the target bonus for
the prior year), payable in accordance with Section 3(d) below

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     For purposes of this Section 3(c), “Cash Severance Change in Control” shall mean and include
the following:

               (i) the acquisition, directly or indirectly, by any “person” or “group” (as those terms are
defined in Sections 3(a)(9), 13(d) and 14(d) of the Exchange Act and the rules thereunder) of
“beneficial ownership” (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities
entitled to vote generally in the election of directors ( “voting securities” ) of the Company that
represent 50% or more of the combined voting power of the Company’s then outstanding voting
securities, other than:

                    (A) an acquisition by a trustee or other fiduciary holding securities under any employee
benefit plan (or related trust) sponsored or maintained by the Company or any person controlled by
the Company or by any employee benefit plan (or related trust) sponsored or maintained by the
Company or any person controlled by the Company,

                    (B) an acquisition of voting securities by the Company or a corporation owned, directly or
indirectly by the shareholders of the Company in substantially the same proportions as their
ownership of the stock of the Company; or

                    (C) in a public offering of the Company’s securities.

               (ii) A change in the composition of the Board occurring within a twelve (12) month period, as
a result of which a majority of the incumbent directors are replaced by directors whose appointment
or election is not endorsed by a majority of the incumbent directors before the date of the
appointment or election; or

               (iii) the consummation by the Company (whether directly involving the Company or indirectly
involving the Company through one or more intermediaries) of (x) a merger, consolidation,
reorganization, or business combination or (y) a sale or other disposition of all or substantially
all of the Company’s assets (provided, the sale of assets does not constitute a related party
transfer as set forth in Treasury Regulation §1.409A-3(i)(5)(viii)(B)), in each case other than a
transaction which results in the Company’s voting securities outstanding immediately before the
transaction continuing to represent (either by remaining outstanding or by being converted into
voting securities of the Company or the person that, as a result of the transaction, controls,
directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of
the Company’s assets or otherwise succeeds to the business of the Company (the Company or such
person, the “Successor Entity” ) directly or indirectly, at least fifty percent (50%) of the
combined voting power of the Successor Entity’s outstanding voting securities immediately after the
transaction,

     For purposes of subsection (i) of the definition of “Change in Control,” the calculation of
voting power shall be made as if the date of the acquisition were a record date for a vote of the
Company’s shareholders, and for purposes of subsection (iii) of the definition of “Change in
Control,” the calculation of voting power shall be made as if the date of the consummation of the
transaction were a record date for a vote of the Company’s shareholders.

          (d) Application of Section 280G of the Code. In the event that it shall be determined
that any payment or distribution in the nature of compensation (within the meaning of section
280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable or

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distributed or distributable pursuant to the terms of this Agreement or otherwise (a
“Payment”), would constitute an “excess parachute payment” within the meaning of section 280G of
the Code, the aggregate present value of the Payments under the Agreement shall be reduced (but not
below zero) to the Reduced Amount (defined below), provided that the reduction shall be made only
if the Accounting Firm (described below) determines that the reduction will provide the Executive
with a greater net after-tax benefit than would no reduction. The “Reduced Amount” shall be an
amount expressed in present value which maximizes the aggregate present value of Payments under
this Agreement without causing any Payment under this Agreement to be subject to the Excise Tax
(defined below), determined in accordance with section 280G(d)(4) of the Code. The term “Excise
Tax” means the excise tax imposed under section 4999 of the Code, together with any interest or
penalties imposed with respect to such excise tax. Unless the Executive shall have elected another
method of reduction by written notice to the Company prior to the Change of Control, the Company
shall reduce the Payments under this Agreement by first reducing Payments that are not payable in
cash and then by reducing cash Payments. Only amounts payable under this Agreement shall be
reduced pursuant to this subsection (d). All determinations to be made under this subsection (d)
shall be made by an independent certified public accounting firm selected by the Company
immediately prior to the Change of Control (the “Accounting Firm”), which shall provide its
determinations and any supporting calculations both to the Company and the Executive within 10 days
of the Change of Control. Any such determination by the Accounting Firm shall be binding upon the
Company and the Executive. All of the fees and expenses of the Accounting Firm in performing the
determinations referred to in this subsection (d) shall be borne solely by the Company.

          (e) Payment Administration. Subject to Section 4 below, the severance payment under
Section 3(c) shall be made in a single lump sum on the release effective date of the Release
Agreement referenced in Section 5; provided, however, no amount shall be paid pursuant to this
Section 3(e) unless, on or prior to the fifty-fifth (55th) day following the later of (i) the
Executive’s Separation from Service or (ii) the effective date of a Cash Severance Change in
Control occurring within three months following Executive’s Separation from Service, Executive has
executed an effective Release Agreement and any applicable revocation period has expired. Payments
under Section 3(c) shall be in addition to the payments under Section 1(e) but shall be in lieu of,
and not in addition to, the payment of any cash severance payments that Executive may otherwise be
entitled to under Section 2 of this Agreement.

          (f) No Duty to Mitigate. Executive’s reemployment at any time following the
termination of Executive’s employment shall have no effect on his right to collect severance under
this Section 3.

     4. Section 409A Payment Delay.

          (a) Payment Delay. Notwithstanding anything herein to the contrary, to the extent any
payments to Executive pursuant to Sections 2 or 3 are treated as non-qualified deferred
compensation subject to Section 409A of the Code, then (i) no amount shall be payable pursuant to
such section unless Executive’s termination of employment constitutes a “separation from service”
with the Company (as such term is defined in Treasury Regulation Section 1.409A-1(h) and any
successor provision thereto) (a “Separation from Service”), and (ii) if Executive, at the time of
his Separation from Service, is determined by the Company to be a “specified employee” for purposes
of Section 409A(a)(2)(B)(i) of the Code and the Company determines that delayed commencement of

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any portion of the termination benefits payable to Executive pursuant to this Agreement is
required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code
(any such delayed commencement, a “Payment Delay”), then such portion of the Executive’s
termination benefits described in Section 2 or 3, as the case may be, shall not be provided to
Executive prior to the earlier of (A) the expiration of the six-month period measured from the date
of the Executive’s Separation from Service, (B) the date of the Executive’s death or (C) such
earlier date as is permitted under Section 409A. Upon the expiration of the applicable Code
Section 409A(a)(2)(B)(i) deferral period, all payments deferred pursuant to a Payment Delay shall
be paid in a lump sum to Executive within 30 days following such expiration, and any remaining
payments due under the Agreement shall be paid as otherwise provided herein. The determination of
whether Executive is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as
of the time of his Separation from Service shall made by the Company in accordance with the terms
of Section 409A of the Code and applicable guidance thereunder (including without limitation
Treasury Regulation Section 1.409A-1(i) and any successor provision thereto).

          (b) Exceptions to Payment Delay. Notwithstanding Section 4(a), to the maximum extent
permitted by applicable law, amounts payable to Executive pursuant to Section 2 or 3, as the case
may be, shall be made in reliance upon Treasury Regulation Section 1.409A-1(b)(9) (with respect to
separation pay plans) or Treasury Regulation Section 1.409A-1(b)(4) (with respect to short-term
deferrals). Accordingly, the severance payments provided for in Section 2 and 3 are not intended
to provide for any deferral of compensation subject to Section 409A of the Code to the extent (i)
the severance payments payable pursuant to Section 2 or 3, as the case may be, by their terms and
determined as of the date of Executive’s Separation from Service, may not be made later than the
15th day of the third calendar month following the later of (A) the end of the Company’s fiscal
year in which Executive’s Separation from Service occurs or (B) the end of the calendar year in
which Executive’s Separation from Service occurs, or (ii) (A) such severance payments do not exceed
an amount equal to two times the lesser of (1) the amount of Executive’s annualized compensation
based upon Executive’s annual rate of pay for the calendar year immediately preceding the calendar
year in which Executive’s Separation from Service occurs (adjusted for any increase during the
calendar year in which such Separation from Service occurs that would be expected to continue
indefinitely had Executive remained employed with the Company) or (2) the maximum amount that may
be taken into account under a qualified plan pursuant to Section 401(a)(17) for the calendar year
in which Executive’s Separation from Service occurs, and (B) such severance payments shall be
completed no later than December 31 of the second calendar year following the calendar year in
which Executive’s Separation from Service occurs.

          (c) Interpretation. To the extent the payments and benefits under this Agreement are
subject to Section 409A of the Code, this Agreement shall be interpreted, construed and
administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the
Code and the Treasury Regulations thereunder (and any applicable transition relief under Section
409A of the Code).

     5. Release.

          (a) Execution of Release. As a condition of Executive’s right to receive the payments
described in Sections 2(a) and 3(c), Executive shall within 21 days following Executive’s
termination of employment (or within 45 days if Executive is terminated as part of a group layoff)
execute and deliver to the Company a full and complete release of all claims, known and unknown,
that Executive may

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have against the Company and its related past and present entities, officers,
directors, shareholders, agents, representatives, successors and employees, such release to be
substantially in the form of the release attached hereto as Exhibit A (the “Release
Agreement”); provided, however, that any conflict between the terms of this Agreement and such form
of release attached as Exhibit A shall be resolved in favor of this Agreement.

          (b) Effect of Failure. In the event Executive fails to deliver or revokes the release
referred to in Section 5(a) above, Executive shall not be entitled to any of the payments described
in Section 2(a) or 3(c) above. In the event that, prior to the end of the Severance Period,
Executive breaches any of his obligations under this Agreement, including this Section 5, the
Company’s obligations to provide the payments under Sections 2(a) and 3(c) shall thereupon cease
and the Company shall be entitled to recover from Executive any and all amounts theretofore paid to
Executive pursuant to Section 2(a) or 3(c).

     6. Death and Disability. In the event the Executive’s employment at the Company ends
as a result of Executive’s death, this Agreement shall automatically terminate and Executive’s
estate shall be entitled to receive (i) the amounts described in Section 1(e), and (ii) any annual
bonus payable for services rendered in any annual bonus period for the year which had been
completed in its entirety prior to the date on which the Employment Period ends and that had not
previously been paid. The bonus amount under clause (ii) will be payable to Executive’s estate
when and if such annual bonuses would otherwise have been payable; provided, however, it is the
Company’s intent that the bonus shall be evaluated by the Board, and if applicable, paid, no later
than December 31 of the calendar year following the calendar year to which such annual bonus
relates. In the event of Executive’s Disability, the Company shall have the right to terminate
this Agreement and Executive’s employment immediately. Additionally, Executive shall be entitled
to his annual bonus as described under clause (ii) above, except that the payments shall be to
Executive and not his estate.

     7. Miscellaneous.

          (a) Survival. To the extent necessary to give effect to such provisions, the
provisions of this Agreement shall survive the termination hereof, whether such termination shall
be by expiration of the Employment Period or otherwise.

          (b) Binding Effect. This Agreement shall be binding on, and shall inure to the
benefit of, the Company and any person or entity that succeeds to the interest of the Company
(regardless of whether such succession occurs by operation of law) by reason of the sale of all or
a portion of the Company’s equity securities, a merger, consolidation or reorganization involving
the Company or, unless the Company otherwise elects in writing, a sale of all or a portion of the
assets of the business of the Company. This Agreement shall also inure to the benefit of
Executive’s heirs, executors, administrators and legal representatives.

          (c) Assignment. Executive may not assign this Agreement. The Company may assign its
rights, together with its obligations, under this Agreement (i) to any affiliate or subsidiary or
(ii) to third parties in connection with any sale, transfer or other disposition of all or
substantially all of its business or assets.

          (d) Entire Agreement. This Agreement constitutes the entire agreement between the
parties hereto with respect to the matters referred to herein and supersedes any and all prior

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agreements, whether written or oral. There are no promises, representations, inducements or
statements between the parties other than those that are expressly contained herein. Executive
acknowledges that he is entering into this Agreement of his own free will and accord, and with no
duress, that he has read this Agreement and that he understands it and its legal consequences.
Pursuant to the terms of the Offer Letter, Executive is a participant in the annual employee
incentive program for 2009, which shall be interpreted and administered to comply with the terms of
Section 409A of the Code. To the extent that this Agreement otherwise conflicts with the Offer
Letter, the terms of this Agreement shall control.

          (e) Severability; Reformation. In the event that one or more of the provisions of
this Agreement is or shall become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall not be affected
thereby. In the event any covenant contained herein is not enforceable in accordance with its
terms, including, but not limited to, if found to be excessively broad as to duration, scope,
activity or subject, Executive and the Company agree that such covenant shall be reformed to make
it enforceable in a manner that provides as nearly as possible the result intended by this
Agreement so as to be enforceable to the maximum extent compatible with applicable law.

          (f) Waiver. Waiver by any party hereto of any breach or default by the other party of
any of the terms of this Agreement shall not operate as a waiver of any other breach or default,
whether similar to or different from the breach or default waived. No waiver of any provision of
this Agreement shall be implied from any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights hereunder on any occasion or series of
occasions.

          (g) Notices. Any notice required or desired to be delivered under this Agreement
shall be in writing and shall be delivered personally, by courier service, by registered mail,
return receipt requested, or by email and shall be effective upon actual receipt by the party to
which such notice shall be directed, and shall be addressed as follows (or to such other address as
the party entitled to notice shall hereafter designate in accordance with the terms hereof):

               If to the Company:

Questcor Pharmaceuticals, Inc.

Attention: Chief Executive Officer

3260 Whipple Road

Union City, California 94587

               If to Executive:

                  To the most recent address of the Executive set forth in the personnel
records of the Company.

          (h) Amendments. This Agreement may not be altered, modified or amended except by a
written instrument signed by each of the parties hereto.

          (i) Headings. Headings to sections in this Agreement are for the convenience of the
parties only and are not intended to be part of or to affect the meaning or interpretation hereof.

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          (j) Counterparts. This Agreement may be executed in counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the same instrument.

          (k) Withholding. Any payments provided for herein shall be reduced by any amounts
required to be withheld by the Company under applicable Federal, State or local income or
employment tax laws or similar statutes or other provisions of law then in effect.

          (l) Disputes. Any and all disputes connected with, relating to or arising from
Executive’s employment with the Company, this Agreement, or the Release attached as Exhibit A, will
be settled by final and binding arbitration in accordance with the rules of the American
Arbitration Association as presently in force. The only claims not covered by this Agreement are
claims for benefits under the unemployment insurance or workers’ compensation laws. Any such
arbitration will take place in Alameda County, California. The parties hereby incorporate into
this agreement all of the arbitration provisions of Section 1283.05 of the California Code of Civil
Procedure. The Company understands and agrees that it will bear the costs of the arbitration
filing and hearing fees and the cost of the arbitrator. Each side will bear his/its own attorneys’
fees, and the arbitrator will not have authority to award attorneys’ fees unless a statutory
section at issue in the dispute authorizes the award of attorneys’ fees to the prevailing party, in
which case the arbitrator has authority to make such award as permitted by the statute in question.
The arbitration shall be instead of any civil litigation; this means that Executive is waiving any
right to a jury trial, and that the arbitrator’s decision shall be final and binding to the fullest
extent permitted by law and enforceable by any court having jurisdiction thereof. Judgment upon
any award rendered by the arbitrators may be entered in any court having jurisdiction.

          (m) Governing Law. This Agreement shall be governed by the laws of the State of
California, without reference to principles of conflicts or choice of law under which the law of
any other jurisdiction would apply.

          (n) Representation. Executive acknowledges that Stradling Yocca Carlson & Rauth
represents the Company and Executive has neither sought nor received legal advice from Stradling
Yocca Carlson & Rauth in connection with this Agreement.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly
authorized officer and Executive has hereunto set his hand as of the day and year first above
written.

Questcor Pharmaceuticals, Inc.

	 	 	 	 	 
	By: 

	
/s/ Don Bailey
	 	 
		Name: 

	
Don Bailey
	 	 
		Title:

	President & Chief Executive Officer	 	 
	 
	 	 	 	 
	Executive	 	 
	 
	 	 	 	 
	By:

	/s/ David Young	 	 
	 

	 

David Young
	 	 

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EXHIBIT A

Form of Release

SEPARATION AGREEMENT AND GENERAL RELEASE

                                             , on behalf of himself and his heirs, successors, and assigns (the
“Executive”) and Questcor Pharmaceuticals, Inc. (the “Company”) hereby agree to the following terms
and conditions related to the recent termination of Executive’s employment with the Company.

     1. Executive’s employment with the Company ceased effective                                          (the “Termination
Date”). Effective as of that date, Executive (a) relinquished his title[s] of
                                         of the Company, as well as any other officer or employee positions or titles
he may have held with the Company and any of its affiliated companies, and (b) [if applicable]
resigned as a director of the Company and any of its affiliated companies.

     2. With respect to any outstanding business expenses, Executive agrees that on or before , he
will submit a final expense reimbursement statement reflecting any outstanding business expenses
incurred through his Termination date, along with the appropriate receipts and necessary supporting
documentation. The Company will provide reimbursement pursuant to its current business policies
and practices for all reasonable and appropriate business expenses.

     3. Other than any outstanding business expenses and the future payments referenced in
Paragraph 5 below, Executive represents and agrees that he has received all compensation owed to
him by the Company through his Termination Date, including any and all wages, bonuses, incentives,
stock options, commissions, earned but unused vacation, and any other payments, benefits, or other
compensation of any kind to which he was entitled from the Company.

     4. Executive represents to the Company that he is signing this Separation Agreement and
General Release (this “Agreement”) voluntarily and with a full understanding of and agreement with
its terms for the purpose of receiving additional pay and consideration from the Company beyond
that which is owed to him.

     5. Conditioned on Executive’s execution, without subsequent revocation, of this Separation
Agreement and General Release and Executive’s compliance with the terms of this Agreement, the
Company will provide Executive with the consideration in accordance with Section 2(a) and Section
3(c) of the Severance Agreement between Executive and the Company dated                             , 2008 commencing
either eight (8) days after the Company’s receipt of this Separation Agreement and General Release
executed by Executive (the “Release Effective Date”) or as soon thereafter as administratively
practicable.

     6. Upon Executive’s eligibility for health insurance coverage through other employment during
the Severance Period, all insurance premium payments by the Company for Executive and his currently
insured dependents under COBRA shall cease. Other than what is specified in the Employment
Agreement, Executive will not accrue or be entitled to receive any other compensation or benefits,
including but not limited to, vacation, holiday pay, car allowance, etc., during the Severance
Period.

A-1

 

     7. Should Executive fail to execute this Agreement within the time frame provided or should
Executive subsequently revoke or breach this Agreement, this Agreement will immediately become null
and void, no consideration will due or payable, and any and all consideration provided under this
Separation Agreement must be immediately returned.

     8. Executive understands that nothing in this Separation Agreement supersedes his continuing
obligations under the Company’s [Proprietary Information and Inventions Agreement, Policy Against
Insider Training, Confidentiality Agreement, Non-Disclosure Agreement, etc.] which he signed during
his employment, all of which will remain in full force and effect as these documents contain obligations which
continue after the effective date of his termination. Executive agrees to comply with all such
continuing obligations.

     9. In exchange for the consideration described above, which Executive would not otherwise be
entitled to receive, Executive does hereby forever irrevocably and unconditionally fully release
and discharge the Company and its parents, subsidiaries, and affiliates, together with their past
and current officers, directors, agents, employees, partners, shareholders and representatives
(hereinafter collectively referred to as the “Released Parties”) from any and all causes of action,
claims, suits, demands or other obligations or liabilities of every kind and nature (including
without limitation attorneys’ fees and costs), whether known or unknown, that Executive ever had,
now has, or may in the future have that arose on or before the date Executive signs this Agreement,
including but not limited to all claims regarding any aspect of his employment, compensation, or
the termination of his employment with the Company, his offer letter from the Company, the Age
Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, Title VII of
the Civil Rights Act of 1964, 42 U.S.C. section 1981, the Fair Labor Standards Acts, the WARN Act,
the Sarbanes-Oxley Act, the California Fair Employment and Housing Act, California Government Code
section 12900, et seq., the Unruh Civil Rights Act, California Civil Code section 51, all
provisions of the California Labor Code; the Employee Retirement Income Security Act, 29 U.S.C.
section 1001, et seq., all as amended, any other federal, state or local law, regulation or
ordinance or public policy, contract, tort or property law theory, or any other cause of action
whatsoever that arose on or before the date Executive signs this Agreement. Executive’s release
contained herein shall not include any release of any rights, claims or entitlements Executive has
or may have to indemnification under any Indemnification Agreement he entered into with the Company
or pursuant to the Company’s Articles of Incorporation or any coverage Executive may have under the
Company’s directors and officers insurance policy for acts and omissions occurring within the
course and scope of Executive’s employment while acting as an officer or director of the Company.

     10. It is further understood and agreed that as a condition of this Agreement, all rights
under Section 1542 of the Civil Code of the State of California are expressly waived by Executive.
Such Section reads as follows:

“A general release does not extend to claims which the creditor does not
know or suspect to exist in his or her favor at the time of executing the
release, which if known by him or her must have materially affected his
or her settlement with the debtor.”

     Thus, for the purpose of implementing a full and complete release and discharge of the
Released Parties, Executive expressly acknowledges that this Agreement is intended to include and

A-2

 

does include in its effect, without limitation, all claims which Executive does not know or suspect
to exist in his favor against the Released Parties at the time of execution hereof, and that this
Agreement expressly contemplates the extinguishment of all such claims.

     11. Executive agrees to withdraw with prejudice all complaints or charges, if any, he has
filed against any of the Released Parties with any agency or court. Executive agrees that he will
not file any lawsuit, complaint, or charge against any Released Party based on the claims released
in this Separation Agreement and General Release.

     12. The release in this Agreement includes, but is not limited to, claims arising under
federal, state or local law for age, race, sex or other forms of employment discrimination and
retaliation. In accordance with the Older Workers Benefit Protection Act, Executive hereby
knowingly and voluntarily waives and releases all rights and claims, known or unknown, arising
under the Age Discrimination in Employment Act of 1967, as amended, which he might otherwise have
had against the Released Parties. Executive is hereby advised that he should consult with an
attorney before signing this Agreement and that he has 21 days in which to consider and accept this
Agreement by signing and returning this Agreement to the Chairman of the Company’s Compensation
Committee. In addition, Executive has a period of seven days following his execution of this
Agreement in which he may revoke the Agreement. If Executive does not advise the Chairman of the
Compensation Committee by a writing received by him within such seven day period of Executive’s
intent to revoke the Agreement, the Agreement will become effective and enforceable upon the
expiration of the seven days.

     13. Executive acknowledges that this Agreement may be filed by the Company with the Securities
and Exchange Commission in accordance with the Company’s filing obligations under the Securities
Exchange Act of 1934.

     14. Executive represents that he has returned to the Company all proprietary or confidential
information and property of the Company, including but not limited to any Company owned or leased
laptop computer, all keys to the office and leased automobile, all fobs, credit cards, files,
records, access cards, equipment and other Company owned property, records or information in his
possession, including all copies thereof in whatever form, including any and all electronic copies,
and has destroyed all electronic copies of all proprietary or confidential information of the
Company.

     15. Executive acknowledges that he is aware of his obligations under the federal securities
laws relating to trading in the Company’s securities while in possession of material, non-public
information about the Company. Executive further acknowledges that he is aware of his reporting
obligations under Section 16(a) of the Securities Exchange Act of 1934 and that he has properly and
timely filed all forms required by such Section.

     16. Any and all disputes connected with, related to or arising from this Separation Agreement
and General Release will be settled by final and binding arbitration in accordance with the rules
of the American Arbitration Association as presently in force. Any such arbitration will take
place in Alameda County, California. The parties hereby incorporate into this agreement all of the
arbitration provisions of Section 1283.05 of the California Code of Civil Procedure. The Company
understands and agrees that it will bear the costs of the arbitration filing and hearing fees and
the cost of the arbitrator. Each side will bear his/its own attorneys’ fees, and the arbitrator
will

A-3

 

not have authority to award attorneys’ fees unless a statutory section at issue in the dispute
authorizes the award of attorneys’ fees to the prevailing party, in which case the arbitrator has
authority to make such award as permitted by the statute in question. The arbitration shall be
instead of any civil litigation; this means that you are waiving any right to a jury trial, and
that the arbitrator’s decision shall be final and binding to the fullest extent permitted by law
and enforceable by any court having jurisdiction thereof. Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction.

     17. This Separation and General Release shall not be construed against any party merely
because that party drafted or revised the provision in question, and it shall not be construed as
an admission by the Released Parties of any improper, wrongful, or unlawful actions, or any other
wrongdoing against Executive, and the Released Parties specifically disclaim any liability to or
wrongful acts against Executive.

     18. This Agreement may be modified only by written agreement signed by both parties.

     19. In the event any provision of this Agreement is void or unenforceable, the remaining
provisions shall continue in full force and effect.

     20. This Separation Agreement and General Release, along with the above-mentioned
[Confidentiality, Indemnification, and Non-Disclosure Agreements between Company and Executive],
all of which are incorporated herein by this reference, constitute the entire agreement between the
parties regarding the subject matter hereof, and supersede any and all prior and contemporaneous
oral and written agreements. Executive acknowledges and agrees that he is not relying on any
representations or promises by any representative of the Company regarding any term not included in
this Agreement or concerning the meaning of any aspect of this Release Agreement.

     21. This Separation Agreement and General Release may be executed in one or more counterparts
and by facsimile or email, each of which shall be deemed an original but all of which shall
constitute a single document.

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	EXECUTIVE
	 
	Dated:
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	David Young
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	QUESTCOR PHARMACEUTICALS, INC.
	 
	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	By:	 	 
	 

	 	 
	 	 	 	 	 	 

A-4

 

EXHIBIT B

CALIFORNIA LABOR CODE SECTION 2870

     “(a) Any provision in an employment agreement which provides that an employee shall assign, or
offer to assign, any of his or her rights in an invention to his or her employer shall not apply to
an invention that the employee developed entirely on his or her own time without using the
employer’s equipment, supplies, facilities, or trade secret information except for those inventions
that either:

          (1) Relate at the time of conception or reduction to practice of the invention to the
employer’s business, or actual or demonstrably anticipated research or development of the employer;
or

          (2) Result from any work performed by the employee for the employer.

     (b) To the extent a provision in an employment agreement purports to require an employee to
assign an invention otherwise excluded from being required to be assigned under subdivision (a),
the provision is against the public policy of this state and is unenforceable.”

B-1exv10w1

Exhibit 10.1

					
	 	 	 	 	 
	
	 	DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220
	 	 

October 22, 2009

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

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 2009 compensation submission on behalf of the senior executive officers and most highly
compensated employees 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 2009 compensation for those employees. 31 C.F.R. § 30.16(a)(3).

          Pursuant to the Interim Final Rule, the Special Master is required to determine whether the
compensation structure for each senior executive officer and certain most highly compensated
employees “will or may result in payments inconsistent with the purposes of section 111 of EESA or
TARP, or [is] otherwise contrary to the public interest.” Id. § 30.16(a)(3). The Special Master has
determined that, to satisfy this standard, 2009 compensation for AIG’s senior executive officers
and most highly compensated employees generally must comport with the following important
standards:

	 	•	 	Base salary paid in cash should not exceed $500,000 per year, except in
appropriate cases for good cause shown. Such good cause will not exist in any case in which
the employee is to be paid a substantial cash amount pursuant to a previously existing
agreement between AIG and the employee. Overall, cash compensation must be significantly
reduced from cash amounts paid in 2008. In AIG’s case, cash compensation for these
employees will decrease 91% from 2008 levels.
	 
	 	•	 	Rather than cash, the majority of each individual’s base salary will be paid in
the form of stock units reflecting the value of a “basket” of four AIG insurance

 

	 	 	 	subsidiaries that the Company, the Federal Reserve Bank of New York, and the Department of the
Treasury have identified as critical to the future of the company. These units 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 they are earned, with each
installment redeemable one year early if AIG repays its TARP obligations. This structure
encourages employees to remain employed by AIG and to maximize the value of the businesses most
important to its long-term stability while avoiding incentives for unnecessary risk-taking.
Other terms and conditions of these stock units, including any alterations to the structure of
the “basket” to maintain appropriate incentives for employees, will be determined by the AIG,
subject to the Special Master’s approval.
	 
	 	•	 	Total compensation for each individual must be appropriate when compared with
total compensation provided to persons in similar positions or roles at similar
entities. Overall, total compensation must be significantly reduced from the
amounts paid in 2008. In AIG’s case, total compensation for these employees
will decrease 58% from 2008 levels.
	 
	 	•	 	If—and only if—the employee achieves objective performance metrics developed
and reviewed in consultation with the Office of the Special Master, the employee
may be eligible for long-term incentive awards. These awards, however, must be
payable in the form of 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.
Such long-term incentive awards may not exceed one third of total annual
compensation.
	 
	 	•	 	Employees of AIG Financial Products will receive only cash base salaries through
the balance of 2009. Employees who pledged to return amounts paid pursuant to
previously existing retention awards must immediately repay the pledged amount.
	 
	 	•	 	Any and all incentive compensation 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.
	 
	 	•	 	Any and all “other” compensation and perquisites will not exceed $25,000 for each
employee (absent exceptional circumstances for good cause shown to the satisfaction of
the Special Master).
	 
	 	•	 	No severance benefit to which an employee becomes entitled in the future may
take into account a cash salary increase, or any payment of stock salary, that the
Special Master has approved for 2009.

2

 

	 	•	 	No additional amounts in 2009 may be accrued under supplemental executive
retirement plans or credited by the company to other “non-qualified deferred
compensation” plans after the date of the Determination Memorandum.

          The Special Master has also determined that, in order for the approved compensation structures
to satisfy the standards of 31 C.F.R. § 30.16(a)(3), AIG must adopt policies applicable to these
executive officers and employees as follows:

	 	•	 	The achievement of any performance objectives must be certified by the
Compensation and Management Resources Committee of AIG’s Board of
Directors, which is composed solely of independent directors, as part of AIG’s
securities filings. 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, derivative or
other transactions that have an equivalent economic effect that would undermine
the long-term performance incentives created by their compensation structures.
	 
	 	•	 	AIG may not provide a tax “gross up” of any kind to these employees.
	 
	 	•	 	At least once every year, the Compensation and Management Resources
Committee must provide to the Department of the Treasury a narrative description
identifying each compensation plan for its senior executive officers, and
explaining how the plan does not encourage the senior executive officers to take
unnecessary and excessive risks that threaten AIG’s value.

These requirements are described in further detail in the attached Determination
Memorandum.

          The Special Master’s review has been guided by a number of considerations, including each of
the principles articulated in the Interim Final Rule. Id. § 30.16(b)(l). The following principles
were of particular importance to the Special Master in his determinations with respect to AIG’s
compensation structures:

	 	•	 	Performance-based compensation. The overwhelming majority of approved
compensation depends on AIG’s performance, and ties the financial incentives of
AIG employees to the overall performance of the company. A majority of the
salary paid to employees under these structures will be paid in the form of stock
units reflecting the value of four subsidiaries critical to AIG’s long-term stability;
and, because the stock will only be redeemable in equal, one-third installments
beginning on the second anniversary of the date the stock salary is earned (in each
case subject to acceleration by one year if AIG repays its TARP obligations), the
ultimate value realized by the employee will depend on AIG’s performance over
the long term. Guaranteed amounts payable in cash, in contrast, are generally
rejected. Id. § 30.16(b)(1)(iv).

3

 

	 	•	 	Taxpayer return. The compensation structures approved by the Special Master
reflect the need for AIG to remain a competitive enterprise and, ultimately, to be
able to repay TARP obligations. The Special Master has determined that these
approved compensation structures are competitive when compared with those
provided to persons in similar positions or roles at similar entities. Id.
§ 30.16(b)(l)(ii).
	 
	 	•	 	Appropriate allocation. The total compensation payable to AIG employees is
weighted heavily towards long-term structures that are tied to AIG’s performance
and are easily understood by shareholders. As a general principle, guaranteed
income is rejected. Fixed compensation payable to AIG employees should consist
only of cash salaries at sufficient levels to attract and retain employees and
provide them a reasonable level of liquidity.

          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 Annex A. If AIG 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/ Kenneth R.
Feinberg                                     

Kenneth R. Feinberg

Office of the Special Master

TARP Executive Compensation

Attachment

			
	cc:	 	Anastasia D. Kelly, Esquire

Marc R. Trevino, Esquire

4

 

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 financial 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” or, the “Office”) responsibility for reviewing
compensation structures of certain employees at financial institutions that received exceptional
financial assistance under the 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 [is] otherwise contrary to the public interest.” Id.

          American International Group, Inc. (“AIG,” or the “Company”), one of seven Exceptional
Assistance Recipients, has submitted to the Special Master proposed compensation structures for
review pursuant to Section 30.16(a)(3) of the Rule. These compensation structures apply to three
employees that the Company has identified as senior executive officers (the “Senior Executive
Officers,” or “SEOs”) for purposes of the Rule, and nine 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”).

          The Special Master has completed the review of the Company’s proposed compensation
structures pursuant to the principles set forth in the Rule. This Determination Memorandum
sets forth the determinations of the Special Master, pursuant to Section 30.16(a)(3) 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. Immediately following that
date, the Special Master, and Treasury employees working in the Office of the Special Master,
conducted extensive discussions with AIG officials and Company counsel. During these discussions,
the Office of the Special Master informed AIG about the nature of the Office’s work and the
authority of the Special Master under the Rule. These discussions continued for a period of months,
during which the Special Master and AIG explored potential compensation structures for the Covered
Employees.

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          The Rule requires that each Exceptional Assistance Recipient submit proposed compensation
structures for each Senior Executive Officer and Most Highly Compensated Employee no later than
August 14, 2009. 31 C.F.R. § 30.16(a)(3). On July 20, 2009, the Special Master requested from each
Exceptional Assistance Recipient, including AIG, certain data and documentary information necessary
to facilitate the Special Master’s review of the Company’s compensation structures. The request
required AIG to submit data describing its proposed compensation structures, and the payments that
would result from the structures, 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 August 14, 2009.
Following a preliminary review of the submission, and the submission of certain additional
information, on August 31, 2009, the Special Master determined that AIG’s submission was
substantially complete for purposes of the Rule. Id. § 30.16(a)(3). 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 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;
	 
	 	•	 	External information on comparable compensation structures extracted from Equilar’s
Executivelnsight 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);

A2

 

	 	•	 	Consultation with Lucian A. Bebchuk, a world-renowned expert in executive
compensation and the William J. Friedman and Alicia Townsend Friedman Professor of
Law, Economics, and Finance and Director of the Program on Corporate Governance at
Harvard Law School; and
	 
	 	•	 	Consultation with Kevin J. Murphy, a world-renowned expert in executive compensation
and the Kenneth L. Trefftzs Chair in Finance in the department of finance and business
economics at the University of Southern California’s Marshall School of Business.

The Special Master considered these views, 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 2009.

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 [is] 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”). Regulations promulgated pursuant to the Rule require 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)(l)(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)(l)(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,

A3

 

	 	 	 	deferred compensation, or other compensation and benefits previously paid or awarded. Id. §
30.16(b)(l)(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)(l)(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.l6(b)(l)(v).
	 
	 	(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)(l)(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).

A4

 

IV. Compensation Structures and Payments 

A. AIG Proposals

          AIG has provided the Office of the Special Master with detailed information concerning its proposed
2009 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 (or its applicable subsidiary) 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.

          1. AIG Corporate and Operating Units

          AIG has proposed compensation structures for each of three Senior Executive Officers, as well as
for four Most Highly Compensated Employees, each of whom serves as an executive in AIG’s corporate
offices or as a senior executive at an AIG subsidiary.1

          AIG’s proposed compensation structures for each of the seven executives in this group generally
emphasized increases in cash base salary and substantial base salary paid in the form of vested AIG
stock and did not include any compensation payable on the basis of individual performance.

               a. Cash Salary and Cash “Retention” Awards

          AIG generally proposed to increase cash base salaries for employees in this group. AIG’s submission
asserted that these base salaries could be justified by reference to the compensation of persons in
similar positions or roles at similar entities.

          AIG also proposed to pay “retention” awards to three of these employees, in amounts ranging from
$1,500,000 to $2,400,000, that AIG argued were due under agreements providing for legally binding
rights under valid written employment contracts, see 31 C.F.R. § 30.10(e)(2), and thus were not
subject to the review of the Special Master.

 

			
	1	 	On August 16, 2008, AIG entered into a Letter Agreement with Robert H. Benmosche pursuant to
which Mr. Benmosche was appointed Chief Executive Officer of AIG. The Special Master separately
reviewed the Letter Agreement and determined that the compensation structure under the Letter
Agreement was consistent with the Public Interest Standard. See Office of the Special Master,
Letter to Compensation and Management Resources Committee, American International Group, Oct. 2,
2009, available at http://www.financialstability.gov/docs/RobertBenmoscheDeterminationLetter.pdf.
Accordingly, Mr. Benmosche’s compensation package is not addressed in this Determination
Memorandum.

A5

 

               b. Stock Salary

          AIG proposed that employees in this group receive substantial compensation in the form of vested
AIG common stock delivered on the Company’s payroll schedule. AIG proposed that 50% of the stock be
transferable immediately by the employee. AIG proposed to deliver stock salary in amounts ranging
from $250,000 to $4,600,000 to employees in this group.

               c. Annual Long-Term Incentive Awards

               AIG did not propose that employees in this group be granted any compensation subject to the
achievement of performance measures. Specifically, AIG’s Proposed Structures did not include grants
of long-term incentive awards granted in compliance with the requirements of the Rule.

               d. “Other” Compensation and Perquisites

          AIG’s submission included payments of “other” compensation as well as perquisites to the Covered
Employees. The proposed payments varied in value.

               e. Supplemental Executive Retirement Plans and Non-Qualified Deferred Compensation

          AIG also proposed that certain Covered Employees receive compensation in the form of accruals under
a “non-qualified deferred compensation” plan.

               f. Severance Plans

          AIG’s submission to the Office of the Special Master also indicated that, in some cases, the
Proposed Structures would result in increases in amounts payable to these employees pursuant to
severance arrangements.

          2. Covered Employees at AIG Financial Products

          AIG has also proposed compensation structures for five Covered Employees employed by AIG Financial
Products, a subsidiary of the Company. AIG’s proposed compensation structure for each of these five
employees included significant increases in cash base salary, accompanied by a promise, secured by
a segregated pool of cash, to pay the employees substantial amounts based on their performance. In
summary, AIG’s proposed compensation structures for these employees included the following
principal elements:

	 	•	 	Cash base salaries, delivered on a nunc pro tunc basis effective January 1, 2009, ranging
from $285,000 to $950,000.
	 
	 	•	 	Payments from the segregated cash pool ranging from $1,115,000 to $2,612,182.

A6

 

	 	•	 	Total proposed 2009 compensation for five employees of $13,200,000.

          In addition, in the course of discussions with the Office of the Special Master, AIG acknowledged
that certain employees of AIG Financial Products had pledged to repay amounts paid in early 2009 in
connection with certain bonuses. AIG had further acknowledged that four of these five employees
made such pledges and failed, as of the date of AIG’s submission to the Office of the Special
Master, to honor those pledges. The remaining Covered Employee at AIG Financial Products did not
pledge to return any of the amounts received in early 2009.

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. In light of this review and analysis, the
Special Master has determined that both the structural design of AIG’s proposals and the amounts
potentially payable to Covered Employees under the proposals would be inconsistent with the Public
Interest Standard, and, therefore, require modification.

          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 proposal with respect to cash salary and “retention” awards 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,” id. §
30.16(b)(l)(v). AIG’s cash salary proposals for these employees generally exceeded the 50th
percentile of amounts paid to persons in similar positions or roles at similar entities. The
Special Master has concluded that, for Covered Employees at Exceptional Assistance Recipients, cash
salaries generally should target 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 talented employees with the need for compensation structures that reflect the circumstances
of Exceptional Assistance Recipients. Accordingly, the Special Master has concluded that AIG’s
proposed cash salaries are inconsistent with the Public Interest Standard, because the proposed
amounts cannot be supported by reference to amounts payable to persons in similar positions or
roles at similar entities.

          The Special Master also reviewed AIG’s proposed cash salaries in light of the principle that an
“appropriate portion of...compensation should be performance-based over a relevant performance
period.” Id. § 30.16(b)(l)(iv). AIG proposed that cash

A7

 

salaries constitute significant proportions of total compensation, although cash salaries are not
performance-based. The Special Master has concluded that performance-based compensation should
constitute the primary portion of these employees total compensation packages, and therefore that
AIG’s proposed salaries are inconsistent with the Public Interest Standard because the proposed
cash amounts would have constituted too significant a proportion of the employee’s total pay.

          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). AIG proposed cash salaries for three employees that, AIG asserted, were
also entitled to substantial cash payments in 2009 pursuant to previously existing “retention”
awards. Although the Office of the Special Master negotiated for the restructuring of similar
arrangements at other Exceptional Assistance Recipients, discussions with AIG officials did not
lead to an agreed upon restructuring of these “retention” awards. After consulting with officials
at the Federal Reserve Bank of New York and officials at Treasury, and considering their opinions,
the Special Master has concluded that, due to the unique circumstances currently found to exist at
AIG, and the need to retain the services of these three employees who are deemed to be particularly
critical to AIG’s long-term financial success, restructuring these “retention” contracts would not
be consistent with the Public Interest Standard. Instead, the Special Master has considered these
retention awards when determining an appropriate reduction in proposed 2009 cash salaries for these
employees.

          The Special Master has determined that cash salaries of less than $500,000 are generally consistent
with the Public Interest Standard. In particular, the cash salaries of the three employees
receiving payments pursuant to previously existing “retention” awards must not exceed this amount.
The cash salaries that the Special Master has determined to be consistent with the Public Interest
Standard for these employees are described in further detail in Exhibits I and II.

               b. Stock Salary

          First, the Special Master reviewed the amounts of compensation to be granted in the form of stock
salary 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,” id. § 30.16(b)(l)(v). In general, the Special Master has concluded that AIG’s proposed
amounts are consistent with the Public Interest Standard. These amounts, adjusted to reflect each
employee’s responsibilities and role with respect to any change in the financial health or
competitive position of AIG, id. § 30.16(b)(l)(v), are described in further detail in Exhibits I
and II.

          Second, the Special Master reviewed the structure of AIG’s stock salary proposal 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)(l)(i). The Special Master has concluded
that AIG’s proposal, which contemplates that 50% of stock salary will be transferable immediately
by the employee, does not provide sufficient alignment with long-term value creation.

A8

 

          The Special Master also reviewed the structure of AIG’s stock salary proposal in light of the
principle that an appropriate portion of compensation should be “performance-based over a relevant
performance period,” id. § 30.16(b)(l)(iv). Stock salary that is transferable immediately permits
an employee to liquidate his or her investment in the stock immediately rather than over a period
designed to reflect performance.

          Accordingly, the compensation structures the Special Master has determined to be consistent
with the Public Interest Standard would not permit immediate transferability or sale of stock
salary. Instead, stock salary may only be redeemable in three equal, annual installments beginning
on the second anniversary of grant, with each installment redeemable one year early if AIG repays
its TARP obligations.

          Finally, 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)(l)(ii). During this review, the Special Master consulted with
officials at the Federal Reserve Bank of New York and officials at Treasury and considered their
views. Based on this input, the Special Master has determined that the compensation structures
consistent with the Public Interest Standard shall include stock units reflecting the value of a
“basket” of four AIG insurance subsidiaries: American International Assurance Co. Ltd., American
Life Insurance Co., Chartis, and AIG Domestic Life & Retirement Services Group. The value of each
subsidiary, and therefore of the units, is to be determined on the basis of an adjusted book value
measure that will exclude extraordinary events and give employees incentives to focus their efforts
on the earnings generated by these critical businesses. Other terms and conditions of the “basket”
units, including any alterations to the structure of the “basket” to maintain appropriate
incentives for employees, will be determined by AIG subject to the approval of the Office of the
Special Master.2 The units are described in further detail in Exhibits I and II.

 

			
	2	 	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 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 are designed to reflect the value of businesses that comprise over
90% of AIG’s overall value, and to give employees incentives, in AIG’s unique circumstances, to
maximize the value of those businesses and thus the value of the Company as a whole, 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 subsidiary “basket” units constitute “restricted stock unit[s] that are analogous to
TARP recipient stock” for purposes of the Rule. Id. § 30.1.

A9

 

	 	c.	 	Annual Long-Term Incentive Awards

          The Special Master also reviewed AIG’s proposals in light of the principle that an
“appropriate portion of the compensation should be performance-based,” id. § 30.16(b)(l)(iv), and
based on “performance metrics [that are] measurable, enforceable, and actually enforced if not
met.” Id. AIG’s proposals did not include any amounts payable to employees in this group on the
basis of 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 an
annual long-term incentive award payable only upon the achievement of specified, objective
performance criteria developed and reviewed in consultation with the Office of the Special Master.

          The Special Master also evaluated AIG’s proposals in light of recently adopted international
standards providing that incentive compensation should generally be payable over a period of three
years, as well as the principle in the Rule providing that performance-based compensation should be
payable “over a relevant performance period,” id. Accordingly, the Special Master has concluded
that, to meet the Public Interest Standard, restricted stock granted in connection with these
awards should not vest unless the employee remains employed until the third anniversary of grant.
Finally, 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. These awards are described in further detail in
Exhibits I and II.

	 	d.	 	“Other” Compensation and Perquisites

          AIG has proposed substantial payments of “other” compensation, as well as perquisites, to the
Covered Employees. (AIG’s submission included proposed payments of “other” compensation exceeding
$1,500,000 and perquisites exceeding $900,000 to certain employees.) The Special Master has
concluded that, absent special justification, employees—not the Company—generally should be
responsible for paying personal expenses, and that significant portions of compensation structures
should not be allocated to such perquisites and “other” compensation. See id. §30.16(b)(l)(iii).

          The Rule requires that each Exceptional Assistance Recipient annually disclose to Treasury any
perquisites where the total value for any Senior Executive Officer or Most Highly Compensated
Employee exceeds $25,000. An express justification for offering these benefits must also be
disclosed. Accordingly, as described in Exhibits I and II, the
compensation structures the Special Master has determined to be consistent with the Public Interest
Standard provide no more than $25,000 in “other” compensation and perquisites to each of these
employees. 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. To the extent that payments exceeding this limitation have already been made to a Covered
Employee in 2009, those amounts should be promptly returned to the Company.

A10

 

	 	e.	 	Supplemental Executive Retirement Plans and Non-Qualified Deferred
Compensation

          AIG proposed that certain Covered Employees receive compensation in the form of accruals under
a “non-qualified deferred compensation” plan. In such plans, employers periodically credit
employees with an entitlement to post-retirement payments. Over time, these credits accumulate and
employees may become entitled to substantial cash guarantees payable on retirement—in addition to
any payments provided under retirement plans maintained for employees generally.

          The Special Master has concluded that the primary portion of a Covered Employee’s compensation
package should be allocated to compensation structures that are “performance-based over a relevant
performance period.” Id. § 30.16(b)(l)(iv). Payments under the Company’s “non-qualified deferred
compensation” plans do not depend upon “individual performance and/or the performance of the
[Company] or a relevant business unit,” id.; instead, such accruals are simply guaranteed cash
payments from the Company in the future. In addition, these payments can make it more difficult for
shareholders to readily ascertain the full amount of pay due a top employee upon leaving the
Company.

          Covered Employees should fund their retirements using wealth accumulated based on Company
performance while they are employed, rather than being guaranteed substantial retirement benefits
by the Company regardless of Company performance during and after their tenures. Accordingly, as
described in Exhibits I and II, the compensation structures the Special Master has determined to be
consistent with the Public Interest Standard prohibit further 2009 accruals for Covered Employees
under supplemental retirement plans or Company credits to other “non-qualified deferred
compensation” plans following the date of this Determination Memorandum.

	 	f.	 	Severance Plans

          The Special Master has concluded that an increase in the amounts payable under these
arrangements would be inconsistent with the principle that compensation should be
performance-based, id. § 30.16(b)(l)(iv), and that payments should be appropriately allocated among
the elements of compensation, id. § 30.16(b)(l)(iii). Accordingly, for the compensation structures
described in Exhibits I and II to be consistent with the Public Interest Standard, the Company must
ensure that 2009 compensation structures for these employees do not result in an increase in the
amounts payable pursuant to these arrangements.

          2. Covered Employees at AIG Financial Products

          The Office of the Special Master evaluated AIG’s proposed compensation structures for these
employees in light of the principle that compensation structures should, where appropriate, reflect
“the role [an] employee may have had with respect to any change in the financial health or
competitive position of the TARP recipient,” id. § 30.16(b)(l)(vi). The performance of AIG
Financial Products has contributed

A11

 

significantly to the deterioration in AIG’s financial health. Accordingly, the Special Master has
determined that AIG’s proposed compensation structures for these employees are inconsistent with
the Public Interest Standard, because they do not adequately reflect the role of AIG Financial
Products in the change in the financial health and competitive position of AIG.

          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). These employees received significant bonus payments in early 2009
notwithstanding AIG Financial Products’ role in the events necessitating taxpayer intervention.
Accordingly, taking into account the payments made to these employees in early 2009, as well as the
other principles set forth in the Rule, the Special Master has concluded that only the payment of
these employees’ base salaries as in effect on December 31, 2008, and no further amounts of any
kind, is consistent with the Public Interest Standard. These amounts are described in further
detail in Exhibits I and II.

          The Office of the Special Master is engaged in ongoing discussions with the Company with
respect to these employees. These discussions have emphasized the importance of the repayment of
the entire pledged amount by each Covered Employee who pledged to return bonus amounts paid in
2009. Until the Special Master’s consideration of those matters is complete, no payments of
compensation in 2009 to these employees, other than continuation of the cash salaries in effect on
December 31, 2008, would be consistent with the Public Interest Standard.

          3. Departed Employees

          Thirteen employees that 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 cash salaries 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.

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)(iv). In light of the importance of this principle, AIG must take certain additional
corporate governance steps, including those required by the Rule, 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.

A12

 

A. Requirements Relating to Compensation Structures

          In order to ensure that objective compensation performance criteria are “measurable,
enforceable, and actually enforced if not met,” id. § 30.16(b)(l)(iv), long-term incentive awards
may not be granted unless the AIG Compensation and Management Resources Committee determines to
grant such an award in light of the employee’s performance as measured against objective
performance criteria that the Committee has developed and reviewed in consultation with the Office
of the Special Master. This evaluation must be disclosed to shareholders in, and certified by the
Committee as part of, AIG’s securities filings. In addition, the Committee must retain discretion
with respect to each employee, to reduce (but not to increase) the amount of any incentive award on
the basis of its overall evaluation of the employee’s or AIG’s performance (notwithstanding full or
partial satisfaction of the performance criteria).

          In addition, as noted in Part IV, above, and described in Exhibits I and II, the structures
determined by the Special Master to be consistent with the Public Interest Standard include grants
of stock in AIG. It is critical that these compensation structures achieve the Rule’s objective of
“appropriate[ly] allocat[ing] the components of compensation [including] long-term incentives, as
well as the extent to which compensation is provided in...equity,” id. § 30.16(b)(iii).

          The Company must have in effect a policy that would prohibit an employee from engaging in
hedging, derivative or other transactions that have an economically similar effect that would
undermine the incentives created by the compensation structures set forth in Exhibits I and II.
Such transactions would be contrary to the principles set forth in the Rule.

B. Additional Requirements

          In addition to the requirements set forth above, pursuant to the requirements of the Rule, AIG
is required to institute the following corporate governance reforms:

	 	(1)	 	Compensation Committee; Risk Review. AIG must maintain a compensation committee
comprised exclusively of independent directors. Every six months, the committee must
discuss, evaluate, and review with AIG’s senior risk officers any risks that could threaten
the value of AIG. In particular, the committee must meet every six months to discuss,
evaluate, and review the terms of each employee compensation plan to identify and limit the
features in (1) SEO compensation plans that could lead SEOs to take unnecessary and
excessive risks that threaten the value of AIG; (2) the SEO or other employees’
compensation plans that could encourage behavior focused on short-term results and not on
long-term value creation; and (3) the employee compensation plans that could encourage the
manipulation of AIG’s
reported earnings to enhance the compensation of any of the employees. Id. § 30.4; id. §
30.5.
	 
	 	(2)	 	Disclosure with Respect to Compensation Consultants. The compensation committee must
disclose to Treasury an annual narrative description of whether

A13

 

	 	 	 	AIG, its Board of Directors, or the committee has engaged a compensation consultant during the
past three years. If so, the compensation committee must detail the types of services provided
by the compensation consultant or any affiliate, including any “benchmarking” or comparisons
employed to identify certain percentile levels of compensation. Id. § 30.11(c).
	 
	 	(3)	 	Disclosure of Perquisites. As noted in Part IV, AIG must 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. AIG must provide 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. § 30.1l(b).
	 
	 	(4)	 	Clawback. AIG must 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.
	 
	 	(5)	 	Say-on-Pay. AIG must permit a separate shareholder vote to approve the compensation of
executives, as required to be disclosed pursuant to the federal securities laws (including the
compensation discussion and analysis, the compensation tables, and any related material). Id.
§ 30.13. AIG conducted its first such vote in July 2009.
	 
	 	(6)	 	Policy Addressing Excessive or Luxury Expenditures. AIG was required to adopt an excessive or
luxury expenditures policy, provide that policy to 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 the company website. Id. § 30.12.
	 
	 	(7)	 	Prohibition on Tax Gross-Ups. 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. § 30.1l(d).
	 
	 	(8)	 	CEO and CFO Certification. AIG’s chief executive officer and chief financial officer must
provide to the Securities and Exchange Commission 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.
A.

A14

 

VI. Conclusion

          The Special Master has reviewed the Proposed Structures for the Covered Employees for 2009 in
light of the principles set forth at 31 C.F.R. § 30.16(b). On the basis of that review, the Special
Master has determined that the Proposed Structures submitted by AIG require modification 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 structures, will not
result in payments that are inconsistent with the purposes of section 111 of EESA or the 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. 31
C.F.R. § 30.16(c)(l).

          The foregoing determinations are limited to the compensation structures 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) 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.

A15

 

EXHIBIT I

COVERED EMPLOYEES

2009 Compensation

Company Name: American International Group, Inc.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Stock Salary	 	 	 	 
	 	 	 	 	 	 	(Performance based:	 	Long-Term Restricted Stock	 	Total Direct
	 	 	 	 	 	 	The stock vests at grant	 	(Performance based: Awarded	 	Compensation
	 	 	 	 	 	 	and is redeemable in	 	based on achievement of	 	(Cash salary paid to
	 	 	 	 	 	 	three equal annual	 	objective performance goals.	 	date plus two months at
	 	 	Cash Salary	 	installments beginning on	 	Vests after 3 years of service.	 	new run rate + stock
	 	 	(Rate going	 	the 2nd anniversary of	 	Transferability dependent on	 	salary + long-term
	Employee ID	 	forward.)	 	grant.)	 	TARP repayment.)	 	restricted stock.)
	1
	 	$	3,000,000	 	 	$	4,000,000	 	 	$	3,500,000	 	 	$	10,500,000	 
	110
	 	$	350,000	 	 	$	100,000	 	 	$	225,000	 	 	$	675,000	 
	137
	 	$	125,000	 	 	$	0	 	 	$	0	 	 	$	125,000	 
	145
	 	$	177,799	 	 	$	0	 	 	$	0	 	 	$	177,799	 
	150
	 	$	425,000	 	 	$	0	 	 	$	0	 	 	$	425,000	 
	157
	 	$	125,000	 	 	$	0	 	 	$	0	 	 	$	125,000	 
	163
	 	$	350,000	 	 	$	3,104,167	 	 	$	833,333	 	 	$	4,558,333	 
	182
	 	$	144,000	 	 	$	0	 	 	$	0	 	 	$	144,000	 
	188
	 	$	100,000	 	 	$	0	 	 	$	0	 	 	$	100,000	 
	206
	 	$	450,000	 	 	$	4,691,667	 	 	$	2,000,000	 	 	$	7,600,000	 
	209
	 	$	425,000	 	 	$	0	 	 	$	0	 	 	$	425,000	 
	255
	 	$	450,000	 	 	$	0	 	 	$	0	 	 	$	450,000	 
	267
	 	$	375,000	 	 	$	3,566,666	 	 	$	1,750,000	 	 	$	6,108,333	 

Comparison of 2009 compensation to Prior Years: 2007 & 2008 Compensation

2008 Cash decreased by $34.4M or 90.8%

   Total Direct Compensation decreased by $28.4M or 57.8%

2007 Cash decreased by $29.0M or 89.2%

   Total Direct Compensation decreased by $26.3M or 55.7%

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 total number of Covered Employees may be less than 25 because of terminations,
departures and retirements after January 1, 2009.

Note: 3: The terms and conditions of the stock salary and long-term restricted stock to be
awarded to Employee 1, the Chief Executive Officer, differ from those described in these Exhibits. See supra Determination
Memorandum note 1.

E1

 

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.

	 	•	 	Cash base salary. Cash base salaries reflect the go-forward rate for the employee
effective as of November 1, 2009. Compensation paid in the form of cash base salary prior
to that date in accordance with the terms of employment as of June 14, 2009 shall be
permitted unless otherwise noted. 31 C.F.R. § 30.16(a)(3)(iii).
	 
	 	•	 	Stock salary. As described in Part IV, stock salary will be granted in the form of
stock units reflecting the value of a “basket” of four AIG insurance subsidiaries: American
International Assurance Co. Ltd., American Life Insurance Co., Chartis, and AIG Domestic
Life & Retirement Services Group. The value of each subsidiary, and therefore of the units,
will be determined on the basis of an adjusted book value measure that will exclude
extraordinary events. The units 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 grant, with each installment redeemable one year early if AIG repays
its TARP obligations. Other terms and conditions of the “basket” units, including any
alterations to the structure of the “basket” to maintain appropriate incentives for
employees, will be determined by AIG subject to the approval of the Office of the Special
Master.
	 
	 	 	 	Rates of stock salary grants reflect full-year values. Because this is a new compensation
element, the amounts are payable on a nunc pro tunc basis effective January 1, 2009. 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
of a share on the date of award.
	 
	 	•	 	Long-term restricted stock. Long-term restricted stock may be granted upon the
achievement of specified, objective performance criteria that have been developed and
reviewed in consultation with the Office of the Special Master and certified by the
Compensation and Management Resources Committee of AIG’s Board of Directors. Any such stock
may vest only if the employee remains employed by the Company on the third anniversary of
grant (or, if earlier, upon death or disability). The stock shall be transferable only in
25% increments for each 25% of TARP obligations repaid by the Company.
	 
	 	•	 	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.

E2

 

	 	•	 	Supplemental executive retirement plans and non-qualified deferred compensation plans.
Following the date of the Determination Memorandum, no additional 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.
	 
	 	•	 	Qualified Plans. For the avoidance of doubt, the Special Master has determined that
participation by the Covered Employees in tax-qualified retirement, health and welfare, and
similar plans is consistent with the Public Interest Standard.

E3

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