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 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 [AIG  26.92  ---  UNCH  (0)   ] 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.

Health insurance premiums in 2007 rose 6.1 percent, the lowest growth rate in eight years but still well above inflation and worker earnings, according to the latest annual survey from the Kaiser Family Foundation.

It was the fourth consecutive year of slowing growth and the lowest rate of growth since 1999, when premiums increased 5.3 percent.

Since 2001, however, premiums for family coverage have increased 78 percent, while wages have gone up 19 percent and inflation has gone up 17 percent.

The number of employers offering health care benefits was essentially unmoved at 60 percent, down from last year’s 61 percent.

Employees’ annual average cost for single coverage is $4,479 and $12,106 for family coverage. Single workers on average pay $694 of the cost out of their own pockets, while worker contributions for family coverage is $3,281.

According to the survey, 95 percent of firms with 50 or more employees offer health insurance, while smaller firms of 3 – 9 workers are least likely to offer benefits (45 percent).

Overall, 61 percent of firms that offer healthcare benefits allow workers to use pre-tax dollars to pay for their share of their health premium costs.

Covered workers on average pay 16 percent of the overall premiums for single coverage and 28 percent for family coverage – figures that have remained relatively stable over the past years.

However, workers in small firms (three to 199 workers) pay more on average toward the cost of family coverage ($4,236 annually) compared to larger firms ($2,831 annually), the survey said. The opposite is true for single coverage, with workers at small firms annually contributing $561, less than the $759 that workers at larger firms contribute.

For firms with deductibles, the average for single coverage in the most common plan – preferred provider organization (PPO) plans – is $461, down from $473 last year.

Co-payments are also required of a majority of covered workers. The average co-payments were $11 for generic drugs, $25 for preferred drugs, and $43 for non-preferred drugs. Forty-four percent of them have plans requiring co-payments of $20 or $25 for physician visits and prescription drugs.

Among the workers with co-payments for in-network office visits, 75 percent have a co-payment of $15, $20, or $25 per visit with a primary care physician.

For the future, many employers said they expect to make significant changes to their health plans and benefits in 2008.

Overall, 21 percent of firms said they are “very likely” to raise workers’ premium contribution next year. Some firms also said they are “very likely” to increase office visit cost-sharing, increase deductibles, and increase prescription drug cost-sharing.