Citigroup's Shareholder Smackdown
Board: Value Hounds
This is the second year that proxy say on pay has been up for a vote by shareholders. It was part of Dodd-Frank:
At least once every 3 years, a public corporation is required to submit to a shareholder vote the approval of executive compensation. And once every six years there should be a submitted to shareholder vote whether the required approval of executive compensation should be more often that once every three years
While shareholders have input on compensation, the vote is not binding and boards are free to ignore the results--many do. Few compensation plans get voted against and less than 2% were given the thumbs down last year—only 42 companies out of more than 3,000 saw shareholder revolt.
Last week, shareholders resoundingly rebuked Citigroup (NYSE: C) as they voted against the pay package for Vikram Pandit and other senior executives. Some very big shareholders said no including Calpers (9.7 million shares) and the Florida State Board of Administration (9.7 million shares) along with a total of 55% of shareholders.
The common complaint was the bonus and other compensation were insufficiently linked to improved performance of the company. The bonus hurdle is set low and ensures there will be no trouble clearing it. Citigroup need only have $12 billion in earnings before taxes (EBT) cumulative over 2011-2012 for management to be awarded a percentage of EBTas a non-equity bonus. Mr. Pandit gets the largest percentage at .05543% of pre-tax income. In fact, the conditions are already met in 2011 with over $12 billion and 2012 is a given unless Citi has zero or negative EBT.
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Under a separate agreement he has a retention package composed of options, shares of stock and a profit sharing plan that are estimated at another $40 million over the next three years.
While it was an astute move for Mr. Pandit to take $1 in token salary, I feel his heart was not in it. Compare it to Whole Foods' John Mackey who has been taking $1 in salary since 2007. The two year old say on pay is an attempt to ameliorate a trend John Mackey descried back in 2007—- the yawning chasm between pay for top management positions and the workers and the frequent disconnect between corporate results and management compensation.
This is from John Mackey’s letter to shareholders when he announced he would no longer take a salary:
.... The average CEO received 431 times as much as their average employee received in 2004, while Whole Foods' CEO (me) received only 14 times the average employee pay in cash compensation.
Most large companies also pay their executives large amounts of stock options in addition to large salaries and cash bonuses. The average corporation in the United States distributes 75% of their total stock options to only 5 top executives.... At Whole Foods, the exact opposite is true: The top 16 executives have received 7% of all the options granted while the other 93% of the options have been distributed throughout the entire company.
John Mackey’s gesture was genuine; Pandit’s symbolic $1 pay is more calculated to keep him at the top at Citi.
Mackey stuck with his egalitarian views and is still taking $1, but as soon as Citigroup was back in the black, Pandit was making up for lost time and cash with his $15 million reimbursement package. In justifying the pay package, the proxy filing notes that Citigroup net income was $11.1 billion in 2011, 4.4% over 2010 and certainly better than the $1.1 billion loss in 2009. The proxy also points out that Citi repaid the federal government $45 billion in bailout loans. But is it worth $15 million? Investors are convinced the compensation is not linked to any real improvement in business operations.
Citigroup is still far from whole and is struggling to return to pre-recession levels. In 2011, revenue was down 9.4% from 2010. Citi Holdings continued to lose money and was a drag on earnings. Citi Holdings revenue declined 33% to $12.9 billion and earnings were ($2.6 billion).
With Citi Holdings performing so poorly, it’s fortunate for Mr. Pandit that his bonus does not depend on them doing any business at all. The accumulated $12 billion in earnings before taxes required over the 2011-2012 period excludes losses from Citi Holdings. The bonus structure was released in two separate 8-Ks in the first half of 2011. The details were not included in the proxy which I find highly unusual. The proxy is the appropriate place to discuss the structure of bonuses and you most often find it there in depth. Perhaps Citi did not want shareholders to think too hard about how easy it was going to be for upper management to collect the big bonuses. Smart shareholders still vetoed the pay. Unfortunately it is not binding and the board can completely disregard it. We need more John Mackeys.