NEW YORK (Bloomberg)—American International Group Inc. is expanding an employee-ranking system to cover at least 30,000 workers as it seeks to more closely link pay with performance.

The plan will include at least half of the 60,000 to 70,000 people that will remain on New York-based AIG's payroll after divestitures of two life insurance units are completed this year, Sandra Kapell, vp in charge of staff performance systems, said Tuesday. The program, which grades employees on a five-point scale, began last year with 10,000 participants and replaces several incentive systems, she said.

“We'd like to have a consistent, transparent performance management process across all of AIG,” Ms. Kapell, 45, said in an interview. “We have to be careful that our compensation programs allow us to retain and attract people with the skill sets we need to repay our obligations.”

CEO Robert Benmosche, 65, must retain valued employees while responding to lawmakers who said the insurer rewarded employees without regard to performance. AIG, which is repaying loans within its $182.3 billion bailout, is under the jurisdiction of U.S. paymaster Kenneth Feinberg, who has set a $500,000 base salary cap for most executives.

AIG's new system awards those in the top 30% with the biggest compensation increases, while those in the middle 50% are considered solid performers, Ms. Kapell said. Those in the bottom 20% are encouraged to talk with their managers about making improvements. Employees will get midyear reviews in a few months, she said.

'Out the door'

Ms. Kapell, who joined AIG in January after six years at rival insurer MetLife Inc., said workers in the pilot program were initially concerned that getting a bottom ranking could cost them their jobs.

“It had been widely reported that in these types of programs, if you're in the bottom 20%, you pretty much have a ticket out the door,” Ms. Kapell said. “We truly view the ‘needs improvement' category as an opportunity for people to have conversations with their managers.”

Mr. Feinberg, who determines pay for AIG's top 25 earners and approves the compensation structure for the next 75, may have put AIG at a “competitive disadvantage,” the firm said this week in its annual proxy filing. The paymaster shifted more executive compensation to stock rather than cash. He slashed the salary for Kristian Moor, head of AIG's property/casualty business, from $1 million to $450,000, and for Chief Financial Officer David Herzog from $675,000 to $350,000, AIG said in the filing.

‘Little business sense'

Chairman Harvey Golub told shareholders in February that the limits “make little business sense” because there have been instances in which AIG couldn't retain some of its most experienced executives.

“That is definitely an issue that we are keeping our eye on,” Ms. Kapell said. “What we want to be extremely careful of is that we have these conversations in a well-informed, factual way, not in a way that sort of stokes the fear of everything that has surrounded AIG.”

More than 60 managers have left AIG since its 2008 rescue, which the company needed after losses tied to soured housing market bets. AIG has also hired executives, announcing in February that Thomas Russo, former chief legal officer of Lehman Brothers Holdings Inc., and Peter Hancock, who was CFO of a predecessor to JPMorgan Chase & Co., joined the insurer.

‘Driven through talent’

AIG, once the world’s largest insurer, said last month it secured agreements to sell two overseas life divisions for a total of about $51 billion. Mr. Benmosche said in an April 1 interview that the sales meant that AIG managers were “well on our way” to repaying the insurer’s rescue loans.

“Business results don’t just show up on a piece of paper, I think they’re driven through talent,” Ms. Kapell said. “In the end, these jobs here are as much about endurance, commitment and thoughtfulness as they are about experience.”

&Copy;2010 Bloomberg News