After being forced by the regulators to shed significant business operations in US and other countries, insurance giant AIG (NYSE:AIG) has chosen to introduce a new compensation policy for its top executives. CEO Robert Benmosche has given green signal to the forced distribution system, which requires executives to be graded on a scale of four.

Under the new system, much like the one originally introduced by Jack Welch in General Electric (NYSE:GE), 10 percent employees will be categorized in grade one while 20 percent will be ranked two. Next in the bell shaped curve will be the majority 50 percent employees ranked three with the final category of 20 percent employees ranked four. Employees ranked one will have a higher pay package than the workers in the subsequent categories.

Apart from General Electric, current enforcers of the forced distribution system include investment bank JP Morgan (NYSE: JPM-B). Although the system is widely touted to be excellent in terms of promoting right talent to the top and weeding out the underperformers over a period of time, it has often been credited to be the cause of unnecessary anxiety among the employees. An unnamed official at JP Morgan puts the situation as “it (the system) forces us to put people at the bottom and then they get worried about being fired, even if they don't deserve to be.”

The move to categorize its employees’ performance comes after much damage has been done. Constant interferences from federal pay czar Ken Feinberg ensured that the existing retention based bonuses stand to lose key employees. So far, AIG has been paying retention bonuses to its key employees on the basis of the length of service in the organization. However, the bonuses have proved to be of little help. The company lost its General Counsel, Anastasia Kelly in December 2009 after the US government started dictating executive compensation in bailed out firms.

The decision to implement a new payment structure seems to have gone down well with the investors. The stock is trading firm at US$27.5 on NYSE, up more than 2 percent. Other favorable developments in the counter have resulted in more than 15 percent increase in the stock price in last 7 days.