AIG-- executives extra pay-- as i predicted :-(

[Miklos Vasarhelyi <miklosv@andromeda.rutgers.edu>]

July 3, 2005

Moonlighting Sure Pays Off at A.I.G.

EVEN the most jaded
observer of outsized executive pay may have been amazed when the

American International Group, the embattled insurance giant, drew
back the curtain on what its top managers received from their association
with C. V. Starr, a private offshore company that sells insurance
policies for A.I.G. And all that, mind you, came on top of what they were
paid for their A.I.G. day jobs. 

C. V. Starr mostly sells and services policies underwritten by A.I.G. It
began operations in 1970 when what is now A.I.G. decided to place several
small, not very profitable insurance agencies into a separate company.
A.I.G. pays commissions to C. V. Starr for placing business with it, and
over the years the little agency has grown into a profit machine.

More recently, however, the company has become a governance nightmare for
A.I.G. That's because it has been run by a raft of A.I.G. executives who
also invested in it, creating the potential for major conflicts.

A.I.G. now says that it is unwinding relationships with C. V. Starr and
Starr International, another offshore company set up by A.I.G., and that
its executives are no longer officers or directors of the
companies.

Last week, investors learned for the first time just how big the benefits
of the C. V. Starr association have been for A.I.G. executives. Maurice
R. Greenberg, the former A.I.G. chief executive, received a salary of
$380,000 and directors' fees of $100,000 in 2004 from C. V. Starr, and a
bonus of $2.6 million, which was at least partially paid by C. V. Starr.
He also received $2.8 million last year in cash dividends generated by
his investment in C. V. Starr shares. That investment grew in value last
year by $8.8 million; the total value of his stake in C. V. Starr was
$121.4 million as of the end of 2004. He paid $1.2 million for this
stake, according to the proxy. 

This was on top of what A.I.G. gave him: $9 million in salary and bonus,
375,000 stock options and perks valued at $300,000. And from Starr
International last year, he received $10.1 million in long-term
compensation and $50,000 in directors' fees. 

Altogether in 2004, he received a total of $34.1 million from A.I.G., C.
V. Starr and Starr International. Almost half of that - 43 percent - was
disclosed for the first time last week. Mr. Greenberg, through a
spokesman, declined to comment. 

Other A.I.G. executives also received nice chunks of C. V. Starr change
last year. Martin J. Sullivan, A.I.G.'s chief executive, received salary,
bonus and long-term compensation of $5.8 million. Wearing his C. V. Starr
hat, he earned as much as $300,000 in salary, bonus and directors' fees
and $400,000 more in cash dividends. His C. V. Starr shares, for which he
paid $337,500, rose in value by $2.5 million last year, to a total value
of $10.1 million. 

Nice work if you can get it. And part time, apparently. The services to
C. V. Starr and Starr International rendered by A.I.G. executives
"are not considered to detract materially from the business time of
these individuals available for A.I.G. matters," last year's proxy
said.

Brian Foley, a specialist in executive compensation in White Plains,
said: "Given that the individuals named were supposedly full time at
A.I.G. and were in fact very well paid by A.I.G., one would have to
conclude that with respect to the Starr entities, they had one of the
best part-time gigs there's ever been."

Ed Matthews, president of C. V. Starr and a former vice chairman of
A.I.G., said that C. V. Starr's results reflect earnings from its agency
business (it booked revenue of approximately $400 million last year),
gains and dividends on its 40 million A.I.G. shares and profits from a
large portfolio that invests in hedge funds, real estate and private
companies. He said the relationship with Starr was very profitable to
A.I.G. 

Asked why the C. V. Starr pay to A.I.G. executives was not disclosed to
shareholders, Mr. Matthews said it was not deemed material. "It was
a private investment company," he said, "and it was hard to
segregate the exact amount that came from the insurance agency, from
A.I.G. shares and from private investments." 

Why did directors make so much money if they did so little? "It
wasn't always this way," he said.

C. V. Starr's relationship with A.I.G. is the subject of a lawsuit by the
Louisiana pension fund contending that C. V. Starr and its investors and
officers benefited from the company's affiliation with A.I.G. at the
expense of A.I.G. shareholders. 

Current A.I.G. executives received salaries, bonuses and directors' fees
from C. V. Starr of as much as $3.7 million last year. They also received
$4.4 million in dividends from C. V. Starr and saw their stakes rise by
$29 million, to a total value of $176 million at the end of 2004.

WHILE investors are just learning about these numbers, A.I.G. said the
compensation committee of its board was told about the pay in the past.
Interestingly, A.I.G.'s outside directors earn base pay of $40,000 a year
while most of the A.I.G. executives on the Starr boards received $150,000
in directors' fees last year. A.I.G. directors do earn an additional
$1,500 for each meeting they attend. 

A.I.G.'s spokesman, Chris Winans, said shareholders were not hurt by the
executives' association with C. V. Starr. In fact, the shareholders
benefited, he said; the pay received by A.I.G. executives from the Starr
companies did not cost A.I.G. anything.

But now it will. 

Mr. Matthews said that he is in the process of selling C. V. Starr's
agencies to A.I.G. and that C. V. Starr plans to buy A.I.G. executives'
stakes. 

If it does not, A.I.G. has guaranteed that it will pay the value of those
C. V. Starr stakes - $176 million at last count. Mr. Winans said that
such a payout was unlikely. He also said A.I.G. would probably start
paying these executives what C. V. Starr had been giving them - proving
again how good it is to be king.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Rutgers University
Director Rutgers Accounting Research Center
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
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