The U.S. 'Pay Czar' Is Said to Be Pressuring AIG on Compensation Plans — Here's One to Consider

The Financial Times reports today that Kenneth Feinberg, the Obama administration's "special master" for compensation at financial companies that received government support during last year's financial sector meltdown, is pressuring AIG to alter some of its current pay packages. An alternative he and the company might consider can be found in a paper by Wharton finance professor Alex Edmans. AIG is the company that got itself in hot water last year for its proposal to pay $168 million in bonuses shortly after receiving $184 billion in taxpayer aid.

In the paper, titled "Dynamic Incentive Accounts," Edmans, along with Xavier Gabaix and Tomasz Sadzik of New York University, and Yuliy Sannikov of Princeton University, outline a system that escrows compensation for a set period of years stretching into the executive's retirement. As Knowledge at Wharton explained in an article about the paper, the longer time frame is designed to prevent the executive from taking short-term actions that may enrich the manager at the expense of the firm's future profits. The plan also provides a rebalancing mechanism to maintain a constant percentage of compensation in cash and stock, so that the executive always has sufficient equity in the firm to provide performance incentives — even if the stock price falls.

Long-term measurements did not appear to be on the mind of an unidentified AIG insider who told the FT that any reduction in compensation "is counterproductive" and would "prompt some [AIG employees] to leave."

More from Knowledge at Wharton:

Outrage over Outsized Executive Compensation: Who Should Fix It and How?