One of the strangest things to come out of Steve Brill's piece on Kenneth Feinberg's role as compensation czar is the bit about AIG's (AIG) stock. Feinberg made stock-based compensation a major plank in his guidelines for the TARP companies whose compensation practices he is in charge of regulating. Paying people in stock rather than cash is supposed to encourage executives to stick around the company and put shareholder interests above personal ones.
So it seemed perverse that AIG argued that stock-based compensation in its case wouldn't work, because AIG stock was essentially worthless. Brill writes that AIG Vice Chairman Anastasia Kelly presented the argument to Feinberg:
Second, and more important, those top executives at A.I.G. who hadn't received the retention bonuses refused to accept the salarized stock as part of their pay packages. They wanted all cash. A.I.G.'s Kelly told Feinberg that their position was that A.I.G.'s stock"”which was trading in the late summer and fall at around $40"”was, in a word that Feinberg says he remembers vividly, "worthless." Kelly explained A.I.G.'s position this way: "We wanted compensation for people at A.I.G. that they would see value in."
Brill goes on to explain that the New York Fed concurred: AIG's stock was worthless. The solution AIG proposed was to pay executives with a special "basket" of stock that reflected the value of only four profitable AIG divisions. These divisions, it was planned, would be spun off or sold. Feinberg agreed to the plan; Brill makes it sound as if more than a gentle push was given for Feinberg to reach this conclusion. (Kelly, by the way, was one of two AIG execs to quit over her compensation, suggesting even this compromise wasn't enough to retain her services.)
Given this, you would think the value of AIG stock would plummet dramatically, but as of today, it's still hovering at about $29 per share. That's despite the company and the government both saying AIG stock is worthless. In August, AIG argued stock-based compensation was something AIG executives would run from, because they, too, knew it was worthless. When Feinberg tried to draw a line in the sand over the issue, the New York Fed told Feinberg they concurred with AIG: Its stock was worthless. In all this time, though, the stock has never gone to zero. (It was coming close, but AIG executed a 1:20 reverse split in July, turning 20 shares of $1.16 stock in one share of $23 stock.) Still, zero times a million is zero. So how can AIG shares be retaining any value? That's the question I was originally trying to answer when I read the report from the Wall Street Journal that says AIG stock payments to executives will be made solely in common shares after all.
So, the company and the New York Fed went to bat against Feinberg to create a special basket of stocks that would be awarded only to AIG executives. Because the stock was "worthless." Then, AIG decided its stock wasn't so bad after all. Its filing reads, "On December 24, 2009, AIG determined to use stock units reflecting the value of AIG's common stock for 2009 stock salary grants, which will be cash-settled on the transferability date required by the Initial Determination Memorandum." Needless to say, AIG didn't bother explaining why. And Feinberg, having ended up winning a battle he thought he'd lost, didn't feel the need to issue any explanatory statements either. But what's clear is AIG specifically went back and asked Feinberg for the option to pay in common stock, rather than from the basket the now-departed Kelly had fought so hard for.
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