updated 4/10/2005 6:04:18 PM ET 2005-04-10T22:04:18

In management circles, retention plans are often known as “golden handcuffs” because they offer sweet deals to executives to stick around or risk losing big benefits.

This takes on a different meaning at American International Group Inc. The CEO may be gone, but the company certainly remains handcuffed to him.

This all has to do with Maurice “Hank” Greenberg, who spent 37 years building AIG into an insurance industry leader. He was forced to resign last month amid a widening probe into the company's financial practices.

While his departure stripped him of his leading role at AIG, Greenberg remains a major shareholder and director of a private organization that owns about 12 percent of AIG stock and directs much of the deferred compensation for AIG's top managers, past and present.

“We have a former CEO and chairman who is under close scrutiny still being able to control the financial packages awarded to the new CEO and executives at the company,” said Gerald Silk, a partner specializing in shareholder lawsuits at the law firm of Bernstein Litowitz Berger & Grossman. “It is a very big problem for AIG that he could be exerting control over the current officers.”

This wasn't the way that AIG had intended its 30-year-old retention program to go. For many years, Starr International has done a good job managing AIG's deferred pay plan. That relationship suddenly has been thrust into the spotlight amid the news of widespread financial irregularities at AIG, which is under investigation by New York Attorney General Eliot Spitzer as well as the Securities and Exchange Commission.

On March 30, AIG admitted to a broad range of improper accounting that could end up slashing its $82.87 billion net worth by about $1.7 billion, or 2 percent. AIG listed numerous areas where it had identified accounting problems, including the way it booked deals with Caribbean-based insurance companies. It has delayed the release of its 2004 annual report.

That acknowledgment came two weeks after the 79-year-old Greenberg was removed as CEO by the board of directors, and just days after the 79-year-old Greenberg decided to retire as chairman as allegations against the company mounted.

But Greenberg's departure from AIG doesn't mean he is out of the picture. In fact, he is still wielding power over AIG's new top decision-makers thanks to his role at Starr International, which was founded in 1975 to compensate AIG managers then and in the future.

Starr International holds AIG shares and other investments that were worth about $19.4 billion at the end of 2003, according to that year's annual report.

Starr International's board gets to decide who can have a stake in the entity, and how much they get. And those AIG executives who are deemed eligible — some 700 participate, according to AIG — are only entitled to receive their accrued share of these funds if they remain employed at AIG until the age of 65. In most cases, if you leave before that, you forfeit your holdings.

Greenberg owns an 8.33 percent controlling stake of Starr International's common stock.

AIG did disclose this unusual relationship in its financial reports. Investors largely haven't balked since the payouts that the Starr program provided didn't dilute the value of their AIG shares or hurt earnings. In 2003 alone, AIG avoided compensation expenses totaling $129.6 million because of the Starr arrangement.

In hindsight, however, this isn't a relationship that is good for the company — something made clear now as the conflict of interests it creates has become known.

So where does AIG go from here? Given the contentious relationship it now has with Greenberg, getting him to relinquish his position at Starr International might not come fast or at all. Greenberg didn't return a call for comment.

Regulators could also force a split of Starr International and AIG.

Or AIG could initiate a breakup, and deal with deferred compensation internally or through a neutral third party — perhaps the best route. All AIG spokesman Joe Norton would say is that company hoped there would be an “amicable resolution” to this situation.

No doubt that whatever way this goes, it will be better than the conflicted arrangement it has now

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