Expert Perspective by Grahall’s OmniMedia Editorial Board
The decision of Citi’s Board in 2011 to “…compensate Vikram commensurate with the job of CEO of Citi” left our Editorial Board wondering if the Board is intent on communicating a “back to business as usual” message to shareholders and regulators. According to Matthias Rieker September 20, 2010 article in the Wall Street Journal (Citi Chairman Intends To Revive CEO’s Pay In 2011) “Pandit had pledged last year to accept only $1 in salary and bonus until Citi returns to profitability. Citi reported a profit for the first and second quarter this year, but Pandit still declined compensation above $1 for this year…”
But Pandit’s commitment to Citi seems not to be shared by his fellow executives, many of whom, we imagine, were involved in decisions that led to the decline of Citi’s stock from well over $50 per share in 2007 to its low of $1.03 in March 2009. (The stock is now trading at around $4.00 per share.) The Citi Board has decided to provide stock salary to six executives in amounts ranging from the equivalent of about $4 million to $9 million. This is on top of “cash salary of about $500,000” for each of these individuals.
But that’s not all, there will be incentive compensation on top of that. Rieker writes: because “…the bank remains subject to the executive compensation provisions of the Emergency Economic Stabilization Act of 2008… bonuses for a bank’s 25 highest-paid executives [are limited ] to no more than one-third of the employee’s overall compensation for a given year.” And compensation includes the cash and the stock salary.
Reiker quotes Citi’s board saying: “Adding stock salary to the cash salary will help Citi’s board to determine ‘the appropriate incentive compensation for 2010’…” Under this scenario, Pandit would be limited to $.33 in incentive bonus for 2010 (of course he has declined any bonus for 2010 as well as any increase in pay over $1). But the other executives stand to earn more millions in incentive bonus.
That’s a tricky way to get around the cash compensation cap (of $500,000 for TAPR companies and $1,000,000 for non TARP companies) and deliver significant incentive bonus dollars to executives.
There is a short holding period on the stock salary of approximately one year (according to an article in Street Insider Citigroup (C) Announces Stock Salaries for Executives; CEO Pandit to Receive $1 for FY10). But with Citi stock essentially having only one way to go – and that would be UP – this probably won’t create a terrible hardship on the stock salary recipients.
But enough carping about seemingly overpaid executives. Is there a good reason (other than to provide hefty recompense to executives) for Citi to use this approach for executive pay? Actually there might be a couple.
Citi might be using this approach as a retention tool for their highest executives. True Citi has shown profitability recently and the turnaround has been led by the management team including Pandit and these six other executives. Holding onto these guys might be seen as critical for the continued improvement on f the enterprise and stock salary and incentive bonuses may help to accomplish that.
It also is a lower leverage approach to pay that might help mitigate risk. Rather than a “pay for performance” approach that could be seen as driving behaviors that add risk to the enterprise, Citi has chosen a “fixed/cash” approach to pay. The compensation numbers might seem high in relationship to the current performance of the company, but this approach to structuring pay can reduce the organization s risk profile and limit the chance that the taxpayers will again have to bail out a company that is too big to fail and too leveraged to succeed.
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