Willumstad led American International Group for about three months, stepping down in September when the firm’s mortgage losses left it close to bankruptcy and in need of a government bailout that has now swelled to about $152 billion.

Willumstad earlier waived a $22.5 million severance payment that he would have been due, according to a document filed with the U.S. Securities and Exchange Commission.The former Citigroup executive had been awarded about one million restricted AIG shares as a sign-on bonus.

AIG said rescinding the stock awards had been agreed by both Willumstad and the company.

Willumstad, who was already AIG’s chairman, took over the CEO post from Martin Sullivan, who stepped down in June as losses on mortgage investments pushed AIG deep into the red.

Willumstad was himself replaced by Edward Liddy in mid-September when the government stepped in with a rescue of the global insurer.

Former AIG CEO Robert Willumstad decided to forego a $22 million severance pay package. He will avoid the intense scrutiny that has befallen other CEOs who walked away from disastrous results with hefty pay packages. It is not indicative of a trend from other CEOs of failing large companies, according to FinancialWeek.

Due to the government saving AIG from bankruptcy, Willumstad was notably under more pressure to forgo a severance package, according to some observers. He also only served as CEO of AIG for three months. While his decision may not ignite a trend, the topic of excessive CEO compensation remains a heated debate.

“There is definitely a trend of some companies cutting back on some of these severance packages, especially for newer executives,” said Equilar research manager Alexander Cwirko-Godycki to FW.

Merrill Lynch eliminated all severance payments for change-in-control scenarios shortly after former CEO Stanley O’Neal left with $161 billion when he was ousted last year. John Thain, who succeeded O’Neal, will receive $11 million accelerated stock awards and salary if he leaves the company after the $50 billion sale of Merrill closes early next year. However he will not receive any additional severance payments due to change-in-control.

In most instances, unless there is a high profile bailout, as is the case with AIG and the U.S. government, executives who are asked to leave without cause, will receive what they are contractually owed.

American International Group will give outgoing CEO Martin J. Sullivan a severance packaged valued at $47 million. Sullivan’s resignation took effect July 1, according to a Reuters report.

Sullivan will receive severance of $15 million and a bonus of $4 million for the portion of the year he worked. He will also maintain outstanding equity and long-term cash awards valued at approximately $28 million, according to the regulatory filing.

Sullivan resigned after AIG wrote down $20 billion in losses on the market value of assets linked to subprime mortgages.

Sullivan was replaced by former Citigroup banker Robert Willumstad. Willumstad was already chairman and plans to complete a plan to revamp AIG by September 2008. AIG last month reported its worst results in 89 years.

These CEOs have little if any “honeymoon” after they step into the role. That makes succession planning on the part of boards more important than ever. Nowhere has this been more evident than on Wall Street, where the very life of some financial services firms depends on the ability of the board to bring in a new CEO capable of turning around the ship in a matter of weeks or months. Investors will not react kindly to the announcement of an interim chief or word that a search is underway.

The latest example of a CEO stepping into a job and getting right to work is American International Group’s Robert Willumstad, who was tapped to replace Martin Sullivan. Willumstad is already attempting to mend ties with disgruntled former AIG CEO Maurice “Hank” Greenberg, who owns significant shares in the company. Willumstad has also promised to overhaul AIG’s strategy to yield better results. The clock started ticking as soon as he took the helm and shareholders will be watching to see whether Willumstad can turn AIG around in quick fashion.

Jeff Kirschner, a senior consultant and head of the financial services practice at Hay Group, says that an incoming CEO can bring renewed optimism. However, Wall Street is notoriously unforgiving and Willumstad and other newly appointed CEOs will be expected to churn out positive results in the first or second quarters of 2009.

Kirschner likens the succession of CEOs to that of managers of major league baseball teams. “You don’t get enough recognition when the team is doing well, but you’re sure to get the blame when your team is doing badly; and you can’t fire the players,” he says. One would think that shareholders might be patient to see what a CEO can do but the reality is that shareholders want to see change right away.

“Shareholders will either have confidence or none at all,” Kirschner says. And, he says, if increased returns can’t be generated off the bat, they at least want to see changes being made. ”Shareholders realize that sometimes great, immediate earnings, are not possible in the first of second quarters. However trust starts building if they see that his or her actions are taking them in the right direction.” The important elements to developing trust are transparency and candor, according to Kirchner.

“You don’t get enough recognition when the team is doing well, but you’re sure to get the blame when your team is doing badly; and you can’t fire the players.” 
                                                                                                   - Jeff Kirschner

To find a CEO that can begin to fix the company on day one on Wall Street, especially during a subprime crisis, is no easy task. Boards want to get it right the first time. Christine Rivers, vice president and a member of Hay Group Boston’s leadership team, believes that boards need to have a comprehensive and thoughtful succession process. “Leadership in general needs to be more prepared so that a board isn’t caught off-guard when their CEO leaves abruptly,” says Rivers. Instead of merely reacting, boards should be proactive.

“More boards are considering succession plans than before. Boards are communicating more with their leadership teams so that in the event that a new CEO needs to be appointed, they already know what candidates would be best suited for the job,” according to Rivers. By getting to know their team better, management is better equipped to handle CEO successions as well as run their business more effectively in general.

A board does not want to be caught off-guard. Rivers says that especially in the financial services sector, companies have been forced to deal with the abrupt departures of CEOs and as a result, a chairman is immediately placed as the interim CEO. “Boards want to look like they have planned for an abrupt resignation or ousting of a CEO,” she says, “No one wants their chairman to become a makeshift interim CEO,” she says.

Rivers believes that boards need to communicate better with shareholders and be more candid. “It is better for a company to take a $4-billion loss initially, rather than take a $1- billion loss and then later having it turn into $4 billion,” she says.

If a company isn’t ready to replace a faltering CEO with a change agent when things go wrong, it could be the board that will find itself on the way out.

In addition, Stephen Bollenback, an AIG director who is supported by billionaire investor Eli Broad, has been named lead director.

His addition is expected to help AIG gain some ground after four decades under Maurice R. “Hank” Greenberg’s leadership. Since Greenberg left AIG in 2005, there have been tumultuous internal battles regarding the company’s direction. Willumstad’s appointment is an attempt to lesson tensions as Greenberg and affiliated shareholders control 12.5 percent of AIG’s shares, according to The Wall Street Journal.

In a statement, Broad said the appointments of Bollenbach and Willumstad are “a positive step forward” and that he hoped for “more harmonious” relations. 

Willumstad plans to focus on what businesses AIG will continue to participate in and which segments should be given more capital to expand. Three years after separating CEO and chairman positions, AIG has combined them once again to prevent an additional change. Bollenbach’s position as lead director is common in companies where the CEO and chairman position are combined. He will be the main representative for outside shareholders on the board.

Meanwhile, the financial products division of AIG is being investigated by the Securities and Exchange Commission for its alleged intentional understatement of the value of subprime mortgage-linked contracts, according to Financial Week. The SEC is focusing on an investor presentation made December 5. Both Sullivan and AIG’s former financial-products chief Joseph Cassano said at the time that risks from the roiling subprime crisis were unlikely to cause the insurer major damage, according to a story Friday in the WSJ.

In May, AIG raised $20 billion of capital that Citigroup said was intended to shore up the division, which earlier had admitted to violating accounting rules. That action resulted in AIG paying $126 million to settle SEC allegations that it sold products that helped PNC Financial Group and cell phone distributor Brightpoint inflate earnings.

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