COO Employment Agreement - Donald P. Kanak

Ex. 10(2)

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (this " Agreement" ), is entered into as of June 27, 2005, by and between American International Group, Inc., a Delaware corporation (the " Company" ), and Donald P. Kanak (" Executive" ).

WHEREAS, Executive is currently employed by the Company as its Executive Vice Chairman and Chief Operating Officer pursuant to that certain employment letter dated as of March 16, 2005 (the " Employment Letter" ); and

WHEREAS, as of the date of this Agreement, the Company wishes to continue Executive' s employment as Executive Vice Chairman and Chief Operating Officer under the terms of a new employment agreement on the terms set forth herein, which shall supersede the Employment Letter; and

WHEREAS, Executive desires to enter into such agreement; and

WHEREAS, Executive' s employment as the Company' s Executive Vice Chairman and Chief Operating Officer is a promotion from his position with the Company prior to March 14, 2005, and the Board of Directors of the Company (the " Board" ) has acknowledged that Executive has been performing his duties as Executive Vice Chairman and Chief Operating Officer under conditions at the Company that are demanding both in terms of the time commitment required and the unique circumstances facing the Company as of the date of this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties hereby agree as follows:

1. Term of Employment . Subject to the provisions of Section 9 of this Agreement, this Agreement shall be effective for a term commencing as of March 14, 2005 (the " Effective Date" ) and ending on the day immediately preceding the third anniversary of the Effective Date (the " Employment Term" ).

2. Position .

(a) Executive shall serve as Executive Vice Chairman and Chief Operating Officer of the Company. In such position, Executive shall have such duties and authority as are consistent therewith. Executive shall report to the Company' s Chief Executive Officer.

(b) During the Employment Term, Executive will devote his full business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services, either directly or indirectly, without the prior written consent of the Board; provided, that nothing herein shall preclude Executive, subject to the prior approval of the Board, from accepting appointment to or continuing to serve on any


2

board of directors or trustees of any business corporation or any charitable or not-for-profit organization or from managing his personal, financial and legal affairs; provided, in each case, and in the aggregate, that such activities do not conflict or interfere with the performance of Executive' s duties hereunder or conflict with Section 11 of this Agreement in any material respect.

3. Base Salary and Non-Variable Compensation .

(a) Base Salary . During the Employment Term, the Company shall pay Executive a base salary (the " Base Salary" ) at the annual rate of $800,000, payable in regular installments in accordance with the Company' s usual payroll practices. The Base Salary shall be retroactive to the Effective Date. During the Employment Term, the Compensation Committee of the Board (the " Compensation Committee" ) shall review the Base Salary annually and may increase the Base Salary, and the term " Base Salary" shall refer to such increased amount.

(b) Non-Variable Compensation . Executive shall receive an additional cash payment with respect to each of fiscal years 2005, 2006 and 2007, in addition to any other amounts described in this Agreement, in an amount equal to the excess, if any, of (i) $1,000,000 over (ii) the aggregate of all (A) supplemental quarterly interim cash bonuses in respect of the Company' s long-term compensation arrangements or otherwise paid in respect of the applicable fiscal year, which shall be paid consistent with past practice, (B) payments, if any, during the applicable fiscal year for service as a director of C.V. Starr & Co., Inc. (" Starr" ) and Starr International Company, Inc. and (C) cash dividends received in respect of the fiscal year, or with respect to the prior fiscal year to the extent not previously taken into account in respect of this clause (C), on common and preferred stock of Starr held by Executive, which compensation shall be paid no later than March 31 of the fiscal year following each of fiscal years 2005, 2006 and 2007. This amount shall be payable in respect of fiscal year 2007 irrespective of the expiration of the Employment Term on the day immediately preceding the third anniversary of the Effective Date, if such amount has not been paid by such time.

4. Bonuses .

(a) Transition Bonus . The Company shall pay Executive a transition bonus, in cash, in an amount equal to $1,100,000 (the " Transition Bonus" ), which shall be paid in four equal installments on, or as soon as reasonably practicable following, each of the following dates, whether or not Executive is employed by the Company on such dates, unless Executive' s employment has been terminated by the Company for " Cause" or by Executive without " Good Reason" (as such terms are defined below): (i) the date Executive and the Company sign this Agreement, and (ii) the last day of each of the second, third and fourth fiscal quarters of the Company in 2005. If Executive' s employment is terminated for any reason other than by the Company for Cause or by Executive without Good Reason before any payment date set forth in the preceding sentence, then, if necessary to avoid the application of Section 409A of the Internal Revenue Code of 1986, as amended (the " Code" ), to any such unpaid portion of the Transition Bonus, Executive shall not receive any such amounts until the first scheduled payroll date that occurs more than six months following the date of termination of employment (the " First Payment Date" ) and, on the First Payment Date, the Company will pay Executive an


3

amount equal to the sum of all amounts that would have been payable following termination of employment in respect of the period preceding the First Payment Date but for the delay imposed on account of the aforementioned Section 409A.

(b) Annual Bonus . Executive may receive an additional annual cash bonus in respect of each full or partial fiscal year of the Company during the Employment Term, as determined in the sole discretion of the Compensation Committee based on its assessment of Company and individual performance in relation to performance targets, a subjective evaluation of Executive' s performance and/or such other criteria as may be established by it (the " Annual Bonus" ). Notwithstanding the foregoing, during the Employment Term, Executive shall be eligible, with respect to each of fiscal years 2006 and 2007, for an annual cash bonus based on the attainment of targets established by the Compensation Committee, which, together with the target value of any long-term or equity-based award in respect of such year (as described in Section 5), shall have a total target value of $6,700,000.

5. Long-Term and Equity-Based Incentives . During the Employment Term, Executive shall be eligible to participate in any long-term incentive compensation plans or equity-based compensation plans maintained by the Company on such basis as may be determined by the Compensation Committee; provided that, as of a date that is not later than March 31, 2006, Executive shall be granted awards in respect of fiscal year 2005 having a value, determined at the date of grant, as reasonably determined by the Compensation Committee, of no less than the excess of (A) $5,600,000 over (B) the sum of (i) the grant date value (as reasonably determined by the Compensation Committee in the same manner) of Company stock options and other equity awards granted to Executive no later than December 31, 2005, in respect of fiscal year 2005, (ii) the annualized fiscal year 2005 grant value (as reasonably determined by the Compensation Committee) of any award made to Executive pursuant to a Company arrangement intended to be in lieu of Executive' s participation in the Starr International Company, Inc. Deferred Compensation Profit Participation Plan and (iii) the value (as reasonably determined by the Compensation Committee) of any additional shares of preferred stock awarded to Executive with respect to fiscal year 2005 by Starr and any growth in book value in respect of 2005 attributable to any common stock of Starr held by Executive. In the event that any shares pursuant to clause (iii) of the preceding sentence have not been awarded, or increase in book value determined, by Starr by March 31, 2006, the Company shall grant Executive a long-term or equity-based award having a value, as reasonably determined by the Compensation Committee, equal to the excess of (X) $5,600,000 over (Y) the value of the awards described in clauses (i) and (ii) of the preceding sentence. Notwithstanding anything to the contrary in this Section 5, during the Employment Term, Executive shall be eligible, with respect to each of fiscal years 2006 and 2007, for a long-term or equity-based award, which, together with any annual cash bonus target in respect of such year (as described in Section 4(b)), shall have a total target value (as reasonably determined by the Compensation Committee) of $6,700,000. The amount actually awarded in respect of 2006 and 2007 shall be offset by the value of (I) awards described in clause (B) of the first sentence of this Section 5, but substituting 2006 or 2007, as applicable, for 2005 in such clause and (II) any shares awarded, or increase in book value determined, in accordance with such clause (B) in respect of the applicable year but later than March 31 of the subsequent year.


4

6. Employee Benefits . During the Employment Term, Executive shall be entitled to participate in the Company' s employee benefit plans (other than any severance or change-in-control plan) as in effect from time to time on the same basis as those benefits are generally made available to other senior executives of the Company.

7. Vacation . Executive shall be entitled to four (4) weeks annual paid vacation in accordance with the vacation policy of the Company.

8. Business Expenses and Perquisites .

(a) Expenses .

(i) During the Employment Term, reasonable business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies.

(ii) In addition, the Company will make Executive whole (on a grossed-up basis) for the excess of (x) any Japanese tax liability imposed on Executive on his income from the Company due to his being reassigned to the Far East in 2005, in respect of his employment with the Company prior to January 1, 2004, over (y) the hypothetical federal income tax liability to which Executive would have been subject on such income had Executive been resident in the United States in accordance with the Company' s MOP Policy, as agreed with Executive during Executive' s assignment; provided that Executive shall appeal the assessment of any such tax in any manner reasonably requested by the Company, with the cost of any such appeal being borne by the Company. The provisions of this Section 8(a)(ii) shall survive the termination of this Agreement.

(b) Perquisites . During the Employment Term, Executive shall be entitled to participate in all of the Company' s perquisite plans, programs and arrangements that are generally provided by the Company to other senior executives from time to time, including, without limitation, the provision of financial and tax planning assistance.

9. Termination . Notwithstanding any other provision of the Agreement:

(a) For Cause by the Company . The Employment Term, and Executive' s employment hereunder, may be terminated at any time by the Company for Cause upon delivery of a " Notice of Termination" (as defined in Section 9(f)) by the Company to Executive. For purposes of this Agreement, " Cause" shall mean, whether occurring prior to, or on or after the Effective Date, (i) Executive' s willful and continued failure to perform substantially his duties with the Company (other than any such failure resulting from Executive' s incapacity due to physical or mental illness) for a period of 10 days after a written demand for substantial performance is delivered to Executive by the Board, which specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive' s duties, (ii) Executive' s willful malfeasance or willful misconduct that results in substantial damage to the Company, (iii) Executive' s willful and material violation of a material provision of the Company' s Code of Conduct or the Director, Executive Officer and Senior Financial


5

Officer Code of Business Conduct and Ethics, as such codes of conduct may be in effect from time to time, or other policies regarding behavior of employees, (iv) conviction of, or entry of a plea of guilty or no contest by Executive with respect to, a felony or any lesser crime of which fraud or dishonesty is a material element, (v) any willful failure by Executive to comply with a material provision of Section 11 of this Agreement, or (vi) Executive' s breach of Section 14 of this Agreement.

For purposes of this provision, no act or failure to act on the part of Executive, shall be considered " willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive' s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Board or the Chief Executive Officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of a simple majority of the members of the Board (other than Executive, if he is a member of the Board) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to Executive, and Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive is guilty of the conduct described in clauses (i), (ii), (iii), (v) or (vi) above, and specifying the particulars thereof in detail; provided, that, no such resolution shall be required for any termination for Cause due to the conduct described in clause (iv) above.

If Executive is terminated for Cause pursuant to this Section 9(a), he shall be entitled to receive only his Base Salary through the date of termination and reimbursement for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy through the date of Executive' s termination, and he shall have no further rights to any compensation (including any Base Salary, Transition Bonus, Annual Bonus (including any Annual Bonus that has been declared but not yet paid), payments from the Company pursuant to Section 3(b) of this Agreement or any long-term or equity-based compensation awards) or any other benefits under this Agreement. All other benefits, if any, due Executive following Executive' s termination of employment for Cause pursuant to this Section 9(a) shall be determined in accordance with the plans, policies and practices of the Company; provided, however, that Executive shall not participate in any severance plan, policy or program of the Company.

(b) Disability or Death . The Employment Term, and Executive' s employment hereunder, shall terminate immediately upon Executive' s death or following delivery of a Notice of Termination by the Company to Executive if Executive becomes physically or mentally incapacitated and is therefore unable for a period of ninety (90) consecutive days or one-hundred twenty (120) days during any consecutive six (6) month period to perform his duties with substantially the same level of quality as immediately prior to such incapacity (such incapacity is hereinafter referred to as " Disability" ). Upon termination of Executive' s employment hereunder for either Disability or death, Executive or Executive' s estate (as the case may be) shall be entitled to receive (i) his Base Salary through the last day of the


6

payroll period during which such termination occurs; (ii) any declared but unpaid Annual Bonus for any fiscal year preceding the year in which the termination occurs; (iii) reimbursement for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy through the date of Executive' s termination (the sum of (i), (ii) plus (iii), the " Accrued Obligations" ); (iv) a pro rata portion of any Annual Bonus that Executive would have been entitled to receive pursuant to Section 4(b) of this Agreement with respect to the fiscal year of termination based upon the percentage of the fiscal year that shall have elapsed through the date of Executive' s termination of employment, and determined by using (X) the Transition Bonus, if such termination occurs during fiscal year 2005, and reducing the pro rata portion of the Transition Bonus by the aggregate amount of all installments of the Transition Bonus that have been paid through the date of termination, or (Y) Executive' s target Annual Bonus for the fiscal year of such termination, if such termination occurs following the end of fiscal year 2005 (the " Pro-Rata Bonus" ), payable as soon as reasonably practicable following the date of Executive' s termination of employment, and (v) in the case of a termination due to Disability, continuation of the Base Salary in effect on the date of termination until the earlier of (A) the second anniversary of the date of termination, and (B) the date Executive is eligible to commence receiving payments under the Company' s long-term disability policy. Notwithstanding the foregoing, in the event of Executive' s termination of employment due to Disability, if necessary to avoid the application of Section 409A of the Code to the amounts payable pursuant to clauses (iv) and (v) of the preceding sentence, Executive shall not receive any such amounts until the First Payment Date and, on the First Payment Date, the Company will pay Executive an amount equal to the sum of all amounts that would have been payable in respect of the period preceding the First Payment Date but for the delay imposed on account of the aforementioned Section 409A. Executive or Executive' s estate (as the case may be) shall have no further rights to any compensation (including any Base Salary, Annual Bonus, payments under Section 3(b) of this Agreement or any long-term or equity-based compensation awards) or any other benefits under this Agreement. All other benefits, if any, due Executive following Executive' s termination for Disability or death shall be determined in accordance with the plans, policies and practices of the Company; provided, however, that Executive (or his estate, as the case may be) shall not participate in any severance plan, policy or program of the Company.

(c) Without Cause by the Company or for Good Reason by Executive . The Employment Term, and Executive' s employment hereunder, may be terminated by the Company without Cause (other than by reason of Executive' s Disability) following the delivery by the Company of a Notice of Termination to Executive or by Executive for Good Reason following the delivery by Executive of a Notice of Termination to the Company. The expiration of the Employment Term on the date immediately preceding the third anniversary of the Effective Date shall not be considered a termination without Cause under this Agreement or otherwise result in the payment of severance or post-employment benefits pursuant to Section 9(c) of this Agreement if Executive is not otherwise terminated pursuant to Section 9(c) of this Agreement prior to such date. If Executive' s employment is terminated by the Company without Cause (other than by reason of Disability) or by Executive for Good Reason, Executive shall be entitled to receive:

(i) within five (5) business days following termination, a lump sum payment in an amount equal to the Accrued Obligations;


7

(ii) the Pro-Rata Bonus, payable as soon as reasonably practicable following the date of Executive' s termination of employment; provided, that, if necessary to avoid the application of Section 409A of the Code to the Pro Rata Bonus, Executive shall not receive any such Pro Rata Bonus installment until the First Payment Date;

(iii) subject to Executive' s continued compliance with Section 11 of this Agreement, an amount equal to the greater of (A) $10,000,000, and (B) an amount equal to the sum of (I) three times the Base Salary (at the rate in effect immediately prior to termination) and (II) three times the actual Annual Bonus paid with respect to the preceding fiscal year (any such amount shall be referred to in this Agreement as the " Severance" ); provided that, for purposes of this sentence, an Annual Bonus shall be deemed to be " paid" at the time that Executive receives an amount in respect thereof at the time that Annual Bonuses are paid to other senior executives of the Company. The Severance shall be payable in equal installments (each, a " Severance Installment" ) over the twelve (12) month period (eighteen (18) month period in the event of a termination by Executive for Good Reason based on the circumstances described in clause (iv) or clause (v) under the definition of Good Reason in this Section 9(c)) commencing with the second of the Company' s standard payroll dates falling after such termination; provided, however, that, if necessary to avoid the application of Section 409A of the Code to the Severance, Executive shall not receive any installment payment until the First Payment Date, and, on the First Payment Date, the Company will pay Executive an amount equal to the sum of all Severance Installments that would have been payable in respect of the period preceding the First Payment Date but for the delay imposed on account of the aforementioned Section 409A;

(iv) continued health and life insurance benefits for Executive and his spouse and dependents, if any, for a thirty six (36) month period following the date of Executive' s termination of employment, on the same basis as such benefits are provided from time to time to actively employed senior executives of the Company; provided, that the Company' s obligation to provide such health and life insurance benefits shall cease with respect to such benefits at the time Executive becomes eligible for such benefits from another employer;

(v) three years of additional service credit and credit for three years of additional age under the Company' s employee pension plans, except for under any plan that is qualified or intended to be qualified under the provisions of Section 401 of the Code, for purposes of benefit accrual, matching contributions, vesting and eligibility for retirement. For the avoidance of doubt, no amounts provided in Section 9(c)(ii) or (iii) of this Agreement shall be included in such calculation, and Executive shall not be entitled to receive any payments pursuant to any non-qualified pension plan of the Company until expiration of the thirty six (36) month period following the Executive' s termination of employment under this Section 9(c); and

(vi) if, as of the date of such termination, (a) Executive is not eligible to participate in any retiree medical or life insurance program of the Company and (b) Executive would have at least 10 years of service with the Company and reached at least age 55 if credited with three years of additional age and service, then the Company shall purchase for Executive a medical and/or life insurance policy, as applicable, that provides coverage that is as comparable as is commercially available to the coverage under the retiree medical and/or retiree life insurance program of the Company, as applicable, as in effect as of the date of Executive' s


8

termination of employment. For the avoidance of doubt, nothing in this Section 9(c)(vi) shall provide Executive wi ...