American International Group Inc has launched a new system to determine how employees get incentive pay, a move that follows public outcry over retention payments the bailed-out insurer made to some staff.

Under the plan, which is being pushed by Chief Executive Robert Benmosche, AIG will rank employees on a scale of 1 to 4, based on how they do relative to their peers, a spokeswoman said on Wednesday.

The top rank will go to only 10 percent of the employees, who will be eligible to get higher incentive pay. Rank 2 will go to 20 percent of the employees and rank 3 will be given to 50 percent. Those who get rank 4 will get minimal incentive pay.

Benmosche's plan differs from AIG's current appraisal process in its use of an employee's performance relative to peers. The new system is going to apply initially to several thousand of AIG's roughly 100,000 employees for evaluating performance in 2009, with the insurer planning to roll out the system across the company over time.

These ratings will help ensure that our people are accountable, recognized and rewarded for their achievements, spokeswoman Christina Pretto said in a statement. By motivating and driving our talent, it will also help us remain competitive and ensure a strong, growing enterprise.

The plan was first reported by the Wall Street Journal.

AIG, propped up by a $182.3 billion U.S. taxpayer-funded aid package, has faced public outrage over retention payments it made to employees of its Financial Products unit, which was behind the insurer's near collapse in September 2008.

AIG, which was contractually obligated to make those payments, paid out $165 million to employees of the unit last March and was paying out $100 million in retention payments this month. It still is on the hook to pay about $75 million by March 15.

Kenneth Feinberg, the U.S. Treasury Department's special master for compensation hired to help sort out pay at firms that received government bailouts, has put restrictions on compensation levels at the insurer.

Earlier, AIG's shares closed up 16.3 percent, or $3.78, at $26.92 on the New York Stock Exchange, in a run-up unrelated to the news about the performance management system. The reason behind the increase was not clear.

(Reporting by Paritosh Bansal; editing by Andre Grenon)

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