Pay Czar Weighs In On AIG Compensation Package

It has been reported that Kenneth Feinberg has officially approved the $10.5 million compensation package of Chief Executive Robert Benmosche, the new head of AIG. Last year, taxpayers bailed out AIG to the tune of $80 billion. The company, and its much maligned credit default swap unit, became the embodiment of what was wrong with pay packages in our financial institutions. Risky investment strategies went unchecked and executives were paid handsomely for those short-term gains that proved devastating to the firm in the long-run.

Indeed, Mr. Benmosche is taking a personal risk in accepting this job. AIG's immediate past CEO, Edward Liddy, who took over the reins at the troubled firm immediately following the bailout, took a symbolic salary of just $1. Liddy has been quoted saying that serving as head of AIG was one of the most difficult things he has had to do in his life. As the former Chairman and CEO of MetLife, Benmosche received a total compensation package of $19.36 million in 2006.

Accepting that the $10.5 million pay package is the going rate for an executive of Mr. Benmosche's abilities and accurately reflects the degree of difficulty of the job, what of the structure of the package? According to reports, the package is comprised of $3 million in cash, $4 million in fully-vested AIG stock and a bonus that could be valued as high at $3.5 million. Not addressed by the government is the company's disregard for IRC -162(m), which limits the tax deductibility of salaries over $1 million. This provision of the tax code was enacted in 1993 to reign in executive compensation. We know now that the provision actually had the opposite effect, shifting compensation to equity-based vehicles during one of the greatest market booms in history -- the result being a massive increase in executive compensation over the subsequent 10 year period. Nevertheless, the tax ramifications of the IRS code remain a reality for corporate America and shareholders. As the largest shareholder of AIG with the greatest "say on pay" for that company, why did Mr. Feinberg allow $2 million of that cash salary to come right off the bottom line? Why not shift that cash compensation to a "performance-based" vehicle, thus affording the company (and its shareholders) the tax deductibility of that compensation? Perhaps Mr. Feinberg realizes that the government will get the money as tax revenue from AIG anyway - but what does that do for the rest of AIG's shareholders who do not receive corporate payroll taxes?