AMERICAN INTERNATIONAL GROUP INC | 2013 | FY |

20. SHARE-BASED AND OTHER COMPENSATION PLANS

 

The following table presents our share-based compensation expense:

 

Employee Plans

 

During 2013, our employees were issued awards under the AIG 2010 Stock Incentive Plan, as amended (2010 Plan), and the AIG 2013 Omnibus Incentive Plan (2013 Plan). The 2013 Plan replaced the 2010 Plan as of May 15, 2013, but does not affect the terms or conditions of any award issued under the 2010 Plan, and is currently the only plan under which share-based awards can be made.

As of December 31, 2013, the Starr International Company, Inc. Deferred Compensation Profit Participation Plans (the SICO Plans) are the only legacy plans for which awards remain unvested.

Our share-settled awards are settled with newly-issued shares of AIG Common Stock. Share awards made by SICO are settled by SICO.

AIG 2013 Omnibus Incentive Plan

 

The 2013 Plan was adopted at the 2013 Annual Meeting of Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of shares that may be granted under the 2013 Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2) the number of authorized shares that remained available for issuance under the 2010 Plan when the 2013 Plan became effective, plus 3) the number of shares of AIG Common Stock relating to outstanding awards under the 2010 Plan at the time the 2013 Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the 2013 Plan reduces the number of shares available for future grants by one share. However, shares with respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock appreciation rights (SARs) awards) are returned to the reserve. During 2013, performance share units (PSUs) and deferred stock units (DSUs) were granted under the 2013 Plan and 55,618,617 shares are available for future grants as of December 31, 2013. PSUs were issued for off cycle grants, which are made from time to time during the year as sign-on awards to new hires or as a result of a change in employee status.

AIG 2010 Stock Incentive Plan

 

The 2010 Plan was adopted at the 2010 Annual Meeting of Shareholders. The total number of shares of AIG Common Stock that could be granted under the 2010 Plan was 60 million. During 2013, 2012 and 2011, we granted PSUs, DSUs, restricted stock units (RSUs), restricted stock and SARs under the 2010 Plan. Each PSU, DSU, RSU, SAR and restricted stock awarded reduced the number of shares available for future grants by one share. Subsequent to the adoption of the 2013 Plan in May 2013, no additional grants were made under the 2010 Plan.

Share-settled Awards

AIG 2013 Long Term Incentive Plan

 

The 2013 Long Term Incentive Plan (2013 LTIP), adopted in March 2013, provides for the grant of performance share units to certain employees, including our senior executive officers and other highly compensated employees. Each recipient of an award is granted a number of PSUs (the target) that provides the opportunity to earn shares of AIG Common Stock based on AIG achieving specified performance measures at the end of the three-year performance period. These performance measures are based on AIG's total shareholder return (TSR) and growth in tangible book value per share (TBVPS) (excluding Accumulated other comprehensive income) relative to a specified peer group, and are weighted at 50 percent each. The actual number of PSUs earned can vary from zero to 150 percent of the target depending on AIG's performance relative to the peer group. Vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of the performance period and January 1 of each of the next two years, resulting in a graded vesting schedule of up to five years. Dividends do not accrue on awards until the shares are delivered. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement or retirement eligibility during the vesting period. Awards made under the 2013 LTIP prior to May 2013 were issued under the 2010 Plan; awards made subsequently were issued under the 2013 Plan.

SICO Plans

 

The SICO Plans provide that shares of AIG Common Stock currently held by SICO are set aside for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of shares under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant's termination of employment with us prior to normal retirement age. A significant portion of the awards under the SICO Plans vest the year after the participant reaches age 65, provided that the participant remains employed by us through age 65. The portion of the awards for which early payout is available vests on the applicable payout date.

SICO Plan awards issued in the form of restricted stock were valued based on the closing price of AIG's Common Stock on the grant date. Although none of the costs of the various benefits provided under the SICO Plans have been paid by us, we have recorded compensation expense for the deferred compensation amounts payable to our employees by SICO, with an offsetting amount credited to Additional paid-in capital reflecting amounts deemed contributed by SICO.

Non-Employee Plans

Our non-employee directors, who serve on AIG's Board of Directors, receive share-based compensation in the form of deferred stock units (DSUs) with delivery deferred until retirement from the Board. In 2013, we granted to non-employee directors 25,735 DSUs under the 2013 Plan, and in 2012 and 2011, we granted 19,434 and 21,203 DSUs, respectively, under the 2010 Plan.

Performance Share Unit Valuation

The fair value of a PSU that will be earned based on AIG's achieving growth in TBVPS relative to a specified peer group was based on the closing price of AIG Common Stock on the grant date; off cycle grants issued after August 1, 2013 were discounted because PSUs are not entitled to dividends during the vesting periods. The fair value of a PSU that will be earned based on AIG's TSR relative to a specified peer group was determined on the grant date using a Monte Carlo simulation.

The following table presents the assumptions used to estimate the fair value of PSUs based on AIG's TSR:

The following table summarizes outstanding share-settled awards^*:

The total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs and unvested restricted stock were $121 million and $30 million, respectively, and the weighted-average and expected period of years over which those costs are expected to be recognized are 1.38 years and 4 years for the PSUs, and 5.17 years and 26 years for the restricted stock, respectively.

Stock Options

 

Options granted under the AIG 2007 Stock Incentive Plan and the 1999 Stock Option Plan generally vested over four years (25 percent vesting per year) and expire 10 years from the date of grant. All outstanding options are vested and out of the money at December 31, 2013. There were no stock options granted since 2008 and no shares were issued in 2013 in connection with previous exercises of options with delivery deferred until 2013. The aggregate intrinsic value for all unexercised options is zero.

The following table provides a roll forward of stock option activity:

 

Cash-settled Awards

 

During the period we were subject to Troubled Asset Relief Program (TARP) restrictions (under the purview of the Special Master), we issued various cash-settled share-based grants, including RSUs, linked to AIG Common Stock, to certain of our most highly compensated employees and executive officers. After the repayment of our TARP obligations in December 2012, we no longer issue awards under these plans.

Share-based cash-settled awards are recorded as liabilities until the final payout is made or the award is replaced with a stock-settled award. Compensation expense is recognized over the vesting periods, unless the award is fully vested on the grant date in which case the entire award value is immediately recognized as expense.

Unlike stock-settled awards, which generally have a fixed grant-date fair value (unless the award is subsequently modified), the fair value of unsettled or unvested cash-settled awards is remeasured at the end of each reporting period based on the change in fair value of one share of AIG Common Stock. The liability and corresponding expense are adjusted accordingly until the award is settled.

Restricted Stock Units

Stock Salary Awards

 

In 2009, we established a program of regular grants of vested stock or units that is generally referred to as "Stock Salary." Stock Salary is determined as a dollar amount through the date that salary is earned and accrued at the same time or times as the salary would otherwise be paid in cash. Stock Salary was granted to any individual qualifying as a senior executive officer or one of our next twenty most highly compensated employees (the Top 25). Stock Salary for a Top 25 employee (other than our CEO) is settled in three equal installments on the first, second and third anniversary of grant. Stock Salary was also granted to individuals qualifying as an executive officer or one of our next 75 most highly compensated employees (Top 26-100), and is generally settled on either the first or third anniversary of grant in accordance with the terms of an employee's award. Stock Salary grants were generally issued in the form of immediately vested RSUs, and the number of units awarded was based on the value of AIG Common Stock on the grant date.

RSUs are settled in cash based on the value of AIG Common Stock on the applicable settlement date. During 2013, 2012 and 2011, we paid $180 million, $111 million and $35 million, respectively, to settle awards. For those awards that were vested and unsettled at the end of each year, we recognized charges of $73 million and $173 million in compensation expense for the years ended December 31, 2013 and 2012, respectively, to reflect fluctuations in the value of AIG Common Stock. At December 31, 2013, the number of vested but unsettled RSUs totaled 2,433,501.

TARP RSUs

 

TARP RSUs awarded require the achievement of objective performance metrics as a condition to entitlement. When vested and transferable, an award would be settled in 25 percent installments in proportion to the settlement of our TARP obligations. Prior to December 2011, TARP RSUs granted to the Top 25 (other than our CEO) vested on the third anniversary of grant, while TARP RSUs granted to the Top 26-100 vested on the second anniversary of grant and are subject to transferability restrictions for an additional year after vesting. TARP RSUs granted December 2011 and thereafter vest in two 50 percent installments on the second and third anniversary of the date of grant. With the repayment of our TARP obligations in December 2012, 100 percent of outstanding TARP RSUs will vest when the service requirements are satisfied.

Other RSUs

 

Fully-vested performance-based RSUs were issued to certain employees in the Top 26-100 in March 2011. The RSUs will be cash-settled three years after the date of issuance based on the value of AIG Common Stock on each settlement date. For the vested and unsettled awards at year-end, we recognized charges of $3 million, $2 million, and a reduction of $2 million in compensation expense for the years ended December 31, 2013, 2012, 2011, respectively, to reflect fluctuations in the value of AIG Common Stock.

During 2013 and 2012, cash-settled performance-based RSUs granted and issued in March 2013 and 2012 to certain highly compensated employees will vest in two 50 percent installments on the second and third anniversary of the date of grant.

Long Term Incentive Plans

 

Certain employees were offered the opportunity to receive additional compensation in the form of cash and cash-settled SARs for the 2009, 2010 and 2011 LTIP or 100 percent cash for the 2012 LTIP if certain performance measures were met. The ultimate value of these awards was contingent on AIG achieving performance measures over a two-year performance period and such value could range from zero to twice the target amount. Subsequent to the performance period, the earned awards are subject to an additional time-vesting period. This results in a graded vesting schedule for the cash portion of up to two years, while the SARs portion cliff-vests two years after the performance period ends.

The cash portion of the awards expensed in 2013, 2012 and 2011 totaled approximately $249 million, $189 million, and $199 million, respectively.

The following table presents a roll forward of SARs and cash-settled RSUs (excluding stock salary) as well as the related expenses:

The total unrecognized compensation cost (net of expected forfeitures) related to unvested SARs and cash-settled RSUs (excluding stock salary) and the weighted-average periods over which those costs are expected to be recognized are as follows:

Stock Appreciation Rights Valuation

 

We use a Monte Carlo simulation approach, which incorporates a range of input parameters that is consistently applied, to determine the fair value of SARs at each reporting period.

The table below presents the assumptions used to estimate the fair value of SARs: