Do Citigroup Executives Deserve Big Bucks For 2012?
At $45 billion, Citigroup (NYSE:C) received more bailout assistance from U.S. taxpayers than any other lender. This little factoid has hang like a cloud over the company ever since the financial crisis. Although the debt has been repaid, the firm is still dealing with the legal and financial fallout. There’s no hiding the fact that Citi’s executive team has faced — and will continue to face, although to a lesser degree — an enormously difficult transition and recovery process.
Within that executive team, and among the company’s board, the difficulty of that transition can’t be overstated. In 2009, former chairman Richard Parsons identified a need to incentivize top executive talent to stay on board throughout the process instead of bailing ship and heading for calmer waters. Parsons’ incentive mechanism solidified into “The Key Employee Profit Sharing Plan,” or KEPSP.
The idea behind KEPSP was nothing revolutionary: pending a successful turnaround, Citi would reward its top executives for their commitment. Ostensibly this is a reasonable way to retain talent during difficult times, but the financial crisis taught shareholders a number of hard lessons about executive payout schemes. Number one was to always question the relationship between dollars and performance…
While Citi certainly has an executive team deserving of tremendous financial incentive, it is also populated with a few bad apples. Former CEO Vikram Pandit, for example, was ousted from the company at the end of 2012. For his performance at the company between 2011 and 2012 — where the stock declined 16 percent — he was set to receive about $19 million in compensation under a specific KEPSP plan. Pandit forfeited the payout, but the size of it sent up a number of red flags.
To its credit, the bank opened its ears to shareholder concerns, and in a proxy filing with the SEC it addressed the issue at length. Specifically, Citi reported that “investors expressed the view that the thresholds for a minimum payout under the Key Employee Profit Sharing Plan were too low.”
Investors rejected a profit-sharing mechanism last year because of these concerns. The company’s board is addressing them in hopes of settling 2012 executive compensation in an upcoming non-binding shareholder vote.
The bank’s response: “The amount of variable incentives for each year will be determined based on performance versus a pre-determined objective scorecard, and a large portion of the resulting amount will be delivered in performance share units that have thresholds that are more aligned with investor expectations. With regard to the performance share units, no awards will occur if the minimum threshold goals for relative total shareholder return and return on assets are not met. With regard to the deferred stock component, these awards are subject to reduction or full forfeiture in the event of losses over the four-year vesting schedule.”
Executive compensation at America’s top banks has been under the public microscope ever since the financial crisis. Recently. JPMorgan (NYSE:JPM) CEO Jamie Dimon had his bonus slashed by 56 percent because of the massive trading loss that the bank suffered in 2012. Granted, the edited bonus was still about $10 million.
In a regulatory filing, JPMorgan’s board said that “as Chief Executive Officer, Mr. Dimon bears ultimate responsibility for the failures that led to the losses in CIO and has accepted responsibility for such failures.” This type of responsibility is what catalyzes huge compensation packages — more risk, more reward.