21. SHARE-BASED COMPENSATION AND OTHER PLANS

Our Consolidated Statement of Operations included share-based compensation expense as follows:




Years Ended December 31, (in millions)	2012		2011			2010

Share-based compensation expense – pre-tax*	$	286	$	(16	)	$	333
Share-based compensation expense – after tax		186		(10	)		216

* As of December 31, 2012, compensation expense for the majority of our outstanding share-based awards is attributed to liability-classified awards, the value of which are based on our share price at the reporting date. Our share price was $35.30, $23.20 and $57.62 at December 31, 2012, December 31, 2011 and December 31, 2010, respectively, and is the primary driver of the volatility in share-based compensation expense. Pre-tax share-based compensation expense related to discontinued operations for the years ended December 31, 2012, 2011 and 2010 of $15 million ($10 million after tax), ($4 million) (($3 million) after tax) and $18 million ($13 million after tax), respectively, is also included.

Employee Plans

Our employees are granted awards under the AIG 2010 Stock Incentive Plan, as amended (2010 Plan), under which we have issued restricted stock, restricted stock units (RSUs) and stock appreciation rights (SARs). The 2010 Plan supersedes all plans for which share-based awards remain outstanding and is currently the only plan under which share-based awards can be issued.

However, of all grants made under the legacy plans, only grants under the 2007 Stock Incentive Plan (the 2007 Plan) and the Starr International Company, Inc. Deferred Compensation Profit Participation Plans (the SICO Plans) remain unvested as of December 31, 2012.

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

Non-Employee Plans

Our non-employee directors received share-based compensation in the form of deferred stock units (DSUs) under the 2010 Plan with delivery deferred until retirement from the Board. In 2012, 2011 and 2010, we granted to directors 19,434, 21,203 and 14,484 DSUs, respectively.

Stock Options

AIG Stock Option Plan

Options granted under the 2007 Plan and the 1999 Stock Option Plan are vested and out of the money at December 31, 2012. These awards generally vested over four years (25 percent vesting per year) and expired 10 years from the date of grant. There were no stock options granted since 2008; however, in 2012, we issued 558,358 shares in connection with previous exercises of options with delivery deferred.

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

As of or for the Year Ended December 31, 2012			Weighted Average Exercise Price



Options:
Exercisable at beginning of year	710,298		$	1,172.25	2.96
Expired	(196,053	)	$	1,284.58

Exercisable at end of year	514,245		$	1,129.42	2.49

The aggregate intrinsic value for all unexercised options is zero, and no unrecognized compensation costs remain for stock options under these plans at December 31, 2012.

Other Share-Settled Awards under Share-Based Plans

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 may be granted under the 2010 Plan is 60,000,000 (the reserve). During 2012, 2011 and 2010, we granted DSUs, RSUs, restricted stock and stock appreciation rights (SARS) under the 2010 Plan. Each RSU, DSU, SAR and share of restricted stock awarded reduces the number of shares available for future grants by one share. The reserve is also reduced for the issuance of cash-settled share-based awards regardless of the form in which the award is originally granted. At December 31, 2012, a total of 25,031,720 shares remained in reserve for future grants under the 2010 Plan.

AIG 2007 Stock Incentive Plan

The 2007 Plan was adopted at the 2007 Annual Meeting of Shareholders. The 2010 Plan superseded the 2007 Plan, therefore, there were no grants made under the 2007 Plan subsequent to May 11, 2010. During 2010, 114,521 time-vested RSUs were granted under the 2007 Plan and vest on the second or the third anniversary of the date of grant.

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 vest on the applicable payout 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.

Restricted Stock and Restricted Stock Unit Valuation

The fair value of restricted stock and RSUs is based on the closing price of AIG Common Stock on the date of grant.

The following table summarizes outstanding share-settled awards and RSUs that are fully vested on the date of grant but subject to transfer restrictions under the foregoing plans^(a):

	Number of Shares/RSUs						Weighted Average Grant-Date Fair Value


As of or for the Year Ended December 31, 2012	AIG Plans^(b)			SICO Plans			AIG Plans		SICO Plans

Unvested, beginning of year(c)		48,892			195,907		$	74.57	$	1,209.45
Granted		241,268			–			31.04		–
Vested		(240,765	)		(48,391	)		34.47		747.11
Forfeited		(10,146	)		(27,572	)		92.70		1,210.60

Unvested, end of year		39,249			119,944		$	48.29	$	1,197.96

(a) Excludes DSUs and options, which are discussed under the Non-Employee Plans and Stock Options sections above.

(b) Excludes legacy Deferred Compensation Profit Participation and Partners Plan for which the final installments (38,959 RSUs) vested on January 1, 2012.

(c) Adjusted to reflect the Company's election in 2012 to cash-settle RSUs that were previously expected to be share-settled.

The total unrecognized compensation cost (net of expected forfeitures) related to unvested SICO awards is $46 million and the weighted-average and expected period of years over which those costs are expected to be recognized are 5.44 years and 27 years, respectively. The unrecognized expense for all other awards totals less than $1 million, with a weighted average period of less than one year.

Liability Awards

We have issued various share-based grants, including restricted stock units, linked to AIG Common Stock, but providing for cash settlement to certain of our most highly compensated employees and executive officers. 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 expensed.

Unlike stock-settled awards, which have a fixed grant-date fair value (unless the award is subsequently modified), the fair value of unsettled or unvested liability 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. Except as noted below, Stock Salary grants issued were awarded 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. During 2012, we issued 2,668,436 RSUs to eligible employees.

In 2010, Stock Salary was awarded in the form of fully vested long term performance units (LTPU) that were measured based on a mix of our hybrid securities and AIG Common Stock weighted 80 percent and 20 percent, respectively. In April 2011, unsettled LTPUs were subsequently converted to RSUs based on the value of AIG Common Stock on the conversion date. RSUs are settled in cash based on the value of AIG Common Stock on the applicable settlement date. During 2012, 2011 and 2010 we paid $111 million, $35 million and $18 million respectively to settle awards; for those awards that were unsettled at the end of each year, we recognized a charge of $173 million, a reduction of $1 million and a charge of $192 million in compensation expense in the respective years to reflect fluctuations in the price of AIG Common Stock.

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. As of December 2011, all TARP RSUs granted will vest in two 50 percent installments on the second and third anniversary of the date of grant. Our TARP obligations were fully repaid in December 2012. Accordingly, 100 percent of outstanding TARP RSUs will vest once the service requirements are satisfied.

Other RSUs

Fully-vested RSUs totaling 271,131 were issued in March 2011 to certain employees in the Top 26-100 based on 2010 performance. Similarly, 301,645 fully vested RSUs were issued in March 2010 for performance in 2009. The RSUs for both awards will be cash-settled in March 2014 and 2013 for the 2010 and 2009 grants, respectively, based on the value of AIG Common Stock on each settlement date. Compensation expense totaling $8 million and $9 million was recorded in December 2010 and December 2009, respectively, when the awards were initially granted and $4 million was recorded for those awards that remained unsettled at December 31, 2012.

During 2012, with the exception of 139,169 fully-vested RSUs issued to certain employees, RSUs granted and issued in March 2012 for Recipients' 2011 performance will vest in two 50 percent installments on the second and third anniversary of the date of grant.

Long Term Incentive Plans

Under our Long-Term Incentive Plan (LTIP), certain employees are offered the opportunity to receive additional compensation in the form of cash and/or SARs if certain performance metrics are met. The ultimate value of LTIP awards is contingent on the achievement of performance measures aligned to the participant's business unit over a two-year 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. For a majority of SARs issued under the 2011 LTIP, the strike price, which is based on our average share price over the 30-day period prior to the March grant date, was $37.40. On January 19, 2011, the previous strike price of $31.91 for SARs issued under both the 2010 LTIP and the 2009 LTIP was adjusted to $26.97 pursuant to anti-dilution provisions of the LTIP due to the issuance of warrants in connection with the Recapitalization (see Note 25 for additional discussion). No SARs were granted in connection with the 2012 LTIP.

The cash portion of the awards expensed in 2012, 2011 and 2010 totaled approximately $189 million, $199 million, and $258 million, respectively.

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

	Number of Units


Year Ended December 31, 2012	SARs			TARP RSUs			RSUs

Unvested, beginning of year^(a)		14,123,062			1,549,622			7,389
Granted^(b)		1,809,842			678,188			836,355
Vested^(c)		(1,864,801	)		(246,434	)		(139,169	)
Forfeited		(1,711,530	)		(91,942	)		(18,285	)

Unvested, end of year		12,356,573			1,889,434			686,290

Net compensation expense for the year (in millions)	$	84		$	31		$	17

(a) Adjusted to reflect our election in 2012 to cash-settle RSUs that were previously expected to be share-settled.

(b) Represents additional SARs earned as a result of the completion of the performance period for the 2010 LTIP.

(c) Pursuant to the terms of the LTIP, vesting was accelerated for SARs awarded to employees who became retirement eligible or were deceased.

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:

At December 31, 2012 (in millions)	Unrecognized Compensation Cost		Weighted- Average Period (years)	Expected Period (years)



SARs	$	28	0.87	2
TARP RSUs		33	1.04	3
RSUs		14	1.00	2

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 awards at each reporting period. The table below presents the assumptions used to estimate the fair value of SARs on December 31, 2012.





Expected dividend yield^(a)	–	%
Expected volatility^(b)	33.78 - 40.57	%
Weighted-average volatility	37.64	%
Risk-free interest rate^(c)	0.34 - 0.40	%
Expected term^(d)	1.0 - 2.0 years

(a) The dividend yield is estimated at zero percent given our recent dividend history. See Note 17 herein for additional information.

(b) The expected volatilities are the implied volatilities with the nearest maturity and strike price as of valuation date from actively traded stock options on AIG Common Stock.

(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and maturity date that is assumed to be constant and equal to the interpolated value between the closest data points on the USD LIBOR-Swap curve as of valuation date.

(d) The term to maturity is specified in the contract of each SARs grant.