Part 1. (AIG's $35.5 Billion Garage Sale saves CEO's money but tax ...

March 2 (Bloomberg) -- American International Group Inc., the bailed-out insurer, may be allowed by the U.S. paymaster to boost salaries for some of its highest-compensated executives,
two people with knowledge of the matter said.

Among AIG’s 25 top-paid managers, some will get raises of less than 10 percent, while others will have their pay cut, according to one of the people, who declined to be identified
because final determinations haven’t been made. The reductions
would be smaller than in 2009, the person said. An announcement
may be made this month, the people said.

AIG’s top leaders had their cash salaries slashed by an average of 91 percent last year as Kenneth Feinberg, the Obama administration special master for executive compensation, used
more stock to link awards to company performance. AIG Chairman
Harvey Golub told shareholders last week that the cuts made
“little business sense” because the firm couldn’t keep some of
its best managers.

“Feinberg realizes that to retain talent, you can’t be as confining as they were last year,” said Jeanne Branthover, a managing director at Boyden Global Executive Search Ltd. in New
York. “For AIG to be successful and pay back the government,
it’s all about their people.”

Feinberg, a Washington lawyer, controls pay for the 25 top- earners at AIG and advises on the compensation for the next 75 workers. Less than half of the group of 25 may get raises, and
overall individual awards, including deferred compensation,
won’t necessarily increase, said one of the people. Mark Herr,
an AIG spokesman, declined to comment.

Salary Cap

“We are in the middle of discussions with AIG and nothing has been decided,” Andrew Williams, a Treasury spokesman, said in an e-mailed statement. “As we have said before, we are not
going to provide a running commentary on Mr. Feinberg’s work.”

In October, Feinberg instituted a $500,000 base salary cap for most employees of AIG, which is majority owned by the government after a bailout that swelled to $182.3 billion.

Exceptions were made for those considered essential to AIG’s success, including Chief Executive Officer Robert Benmosche, 65, and Peter Hancock, the former chief financial
officer of a predecessor to JPMorgan Chase & Co. Benmosche
secured a salary of $3 million in cash and $4 million in stock
last year. Hancock, who oversees finance and risk, is getting
$1.5 million in cash and $2.4 million in stock, AIG said last
month.

More than 60 managers have left AIG since its 2008 rescue, including General Counsel Anastasia Kelly, who told Fortune magazine last month that her $900,000 base salary would have
been slashed to $500,000 and that she might have jeopardized a
severance payment if she stayed.

‘Little Business Sense’

“While we can pay the vast majority of people competitively, on occasion, these restrictions and his decisions have yielded outcomes that make little business sense,” Golub,
70, said of Feinberg last week. “In some cases we are prevented
from providing market-competitive compensation to retain some of
our most experienced and best executives. This hurts the
business and makes it harder to repay the taxpayers.”

About half the executives on the previous top-25 list have departed since the insurer’s September 2008 bailout, and several managers who had been in the group of 75 last year are now among
the top 25 earners, said one of the people.

Bailed Out

“AIG owes the taxpayer a huge amount of money and we want to make sure that my compensation practices take into account the need for AIG to thrive,” Feinberg said in a Dec. 11
interview with Bloomberg Television.

Feinberg in October approved the payment of a combined $2.6 million in retention bonuses to Chief Financial Officer David Herzog and Kristian Moor, a property-casualty manager.

Feinberg said he determined the bonuses, which were previously committed by the insurer to Herzog and Moor, wouldn’t be cut because the executives were “deemed to be particularly
critical to AIG’s long-term financial success.” He said he
weighed the awards in determining cuts to their salaries.

Feinberg, 64, formerly oversaw the September 11th Victim Compensation Fund. He is responsible for setting pay at firms including Chrysler Group LLC, GMAC Inc. and AIG that were among
the top recipients of bailout funds.

AIG said last month that it was overhauling its incentive system to reward employees for performance. A backlash against AIG’s bonuses for employees in the derivatives unit blamed for
the firm’s near-collapse peaked in March of last year with
President Barack Obama criticizing the awards.