Citigroup: To Pay or Not to Pay

by Will Ashworth | April 20, 2012 7:00 am

The say-on-pay folks got a big boost April 17 when Citigroup (NYSE:C[1]) shareholders rejected the $15 million pay package[2] for CEO Vikram Pandit. Despite all the chatter in recent years about excessive C-suite compensation, such a rejection is a rarity in the U.S.

What this means for the future of corporate governance remains to be seen. In this case, for instance, will Citigroup’s board listen to shareholders and revise Pandit’s pay? Or will they simply disregard the shareholder vote and do what they’ve always done — compensate handsomely with little regard for performance?

“CEOs deserve good pay, but there’s good pay and there’s obscene pay,” Brian Wenzinger told The New York Times. Wenzinger is a money manager with Philadelphia’s Aronson Johnson Ortiz, owners of 5 million Citigroup shares. But define obscene. Pandit’s $15 million might seem like a lot given Citigroup’s lackluster performance in recent years, but is it really that bad?

According to The New York Times 2011 CEO Pay Study, which covers the 100 highest-paid CEOs in America, the median CEO was paid $14.4 million[3] in the past year. Pandit ranked 45th with $14.9 million. Included in the group of 44 CEOs making more than the median were four from financial services firms. The leaders of Ameriprise Financial (NYSE:AMP[4]), Wells Fargo (NYSE:WFC[5]), Capital One Financial (NYSE:COF[6]) and Cigna (NYSE:CI[7]) made $17.3 million, $17.9 million, $18.7 million and $18.9 million, respectively. That’s an average of $3.3 million more than Pandit.

Is that obscene? Yes, it’s out of whack with everyone else down the pecking order, but this is the playing field shareholders have agreed to. At least for now.

According to the Times, Citigroup’s stock performed the worst of any large bank over the last decade, yet the bank still managed to rank at the top of CEO compensation. If I understand the Times correctly, it believes future CEO compensation should be tied to past performance. Anyone who follows professional sports knows how well that works. A quarterback gets a big 10-year contract based on his performance the last couple of seasons and then goes into the tank for the remainder of the contract.

It’s a slippery slope when you start believing that the CEO is responsible for the success or failure of a company’s stock. A Harvard Business Review roundtable discussion from 2003 on executive compensation discussed the myth that share prices reflect CEO performance. Former DuPont (NYSE:DD[8]) CEO Ed Woolard took exception to the fact Jack Welch, the former head of General Electric (NYSE:GE[9]), went around saying he deserved all of his largesse because he created $400 billion in market value by the time he retired in 2001.

While Welch certainly can take credit for changing the culture at the industrial conglomerate, he was no more responsible for creating $400 billion in value then he is today responsible for destroying half of that. Paying CEOs based on stock performance is simply an exercise in futility because it isn’t an accurate picture of the job done.

Apple’s (NASDAQ:AAPL[10]) Tim Cook received $376 million in stock grants in 2011; 500,000 shares vest in August 2016 and 500,000 in August 2021. In March, 237,000 shares vested for Cook from awards in 2008 and 2012 that are worth $142 million at current prices. By the time all of his 2011 shares vest in nine years, assuming he doesn’t get hit by a bus or drives the company into the ground, he’ll be a billionaire. All for being in the right place at the right time.

To me, that’s far more obscene than the chump change Citigroup investors are roiling over.

In 2011, Vikram Pandit received stock options worth $7.8 million that will vest over the next three years and remain in effect for 10 years. Currently, the lowest-priced option is $41.54, about $7 out of the money. Theoretically, if the stock doesn’t move over the next three years, he makes nothing — and is likely out of a job.

Therefore, it’s hard to understand how this is obscene, and Bill Ackman, who owns 26 million Citi shares, agrees. Furthermore, 30% of Pandit’s annual incentive award of $13.3 million is deferred over four years and paid in stock, another 30% over four years in cash and only $5.3 million was paid in cash in 2011. Personally, I think shareholders are giving him the short end of the stick undeservedly. Plenty of worse offenders are out there — Apple included.

For a long time I’ve believed the best way to ensure CEOs earn their pay is to provide a pool of funds that CEOs can borrow from to buy company stock. Instead of wasting money on share repurchases, make it available to all employees, not just executives. The better the company performs financially, the larger the pool of funds available.

Then eliminate all options and grants, increase the base salary and improve the cash bonus based on the usual subjective and objective metrics used by compensation consultants. If you want CEOs to act like owners, they have to feel like owners. You don’t create that feeling with options and grants. It’s that simple.

At the end of the day, the Citigroup shareholders say-on-pay vote appears to be much ado about nothing. After all, 75% of the shareholders voted, which means only 41% actually said no to the pay package. If you ask me, the real issues here are shareholder apathy and an ongoing resentment of the banks. And yes, executive compensation does need a permanent fix.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

  1. C:
  2. shareholders rejected the $15 million pay package:
  3. the median CEO was paid $14.4 million:
  4. AMP:
  5. WFC:
  6. COF:
  7. CI:
  8. DD:
  9. GE:
  10. AAPL:

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