Citi Vote Not the Start of a Trend

Other banks will work overtime to avoid a similar outcome

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The financial world is buzzing about the news that a majority of Citigroup shareholders on Tuesday voted against CEO Vikram Pandit's compensation package. The vote came amid widespread and continuous outrage about executive pay from groups like Occupy Wall Street, but don't look for bank executives' compensation packages to plummet anytime soon. The vote, if anything, appears to have more to do with Citi's own shaky performance than by industry-wide pay trends.

"The company should not be surprised. Investors are rightly concerned about last month's report from the Federal Reserve that Citigroup had failed the Fed's latest round of stress tests," wrote Richard A. Bennett, president and CEO of GMI Ratings, a corporate governance ratings agency.

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The vote was made possible by the Dodd-Frank Act's "say-on-pay" provision, which allows firms' shareholders to vote on executive compensation. Though nonbinding, the vote constitutes a sharp blow to Citigroup.

"Vikram Pandit's pay this year was scheduled to be more than [Goldman Sachs CEO] Lloyd Blankfein's.And when I talk to shareholders and ask about that, they have a hard time understanding, in light of the fact that Goldman Sachs has had a much better year than Citigroup," says Robert J. Jackson, Jr., an associate professor of law at Columbia Law School who researches executive compensation. Nearly two-thirds of Citi's shareholders are large institutions like mutual funds and pensions.

In other words, says Jackson, shareholders saw an imbalance between Pandit's compensation and his effectiveness. "It's really about performance. That's what makes this so interesting. These are people with skin in the game."

Compared to compensation for other financial CEOs, Citi's proposed $15 million package for Pandit is not entirely outsized. Richard Fairbank of Capital One receives $18.7 million in compensation, and Wells Fargo's John G. Stumpf earns around $17.9 million, according to figures from executive compensation data provider Equilar. Meanwhile, Bank of America CEO Brian Moynihan made a paltry $8.1 million in compensation last year. Yet unlike Citi, all of those banks passed the Fed's stress tests. Citi has faced other hardships. It announced layoffs of 4,500 workers in December, and its stock price is also down 90 percent from five years ago and has been relatively flat since mid-2009. Meanwhile, Capital One's price has grown almost sixfold from its 2009 trough. JPMorgan Chase has likewise climbed out of its mid-2009 crisis lows.

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"Citigroup is one of most egregious example of disconnect between incentives of top management and value creation of shareholders," Mike Mayo, bank analyst at brokerage firm CLSA, told the Associated Press. "The owners of the big banks, namely the shareholders, are finally taking a greater amount of responsibility by speaking up."

Other banks' shareholders may very well follow suit, says Jackson, but those institutions will also likely work overtime on communicating with shareholders to forestall such a surprise vote.

"A good board of directors, knowing that this vote is coming, will be in touch with those institutional shareholders and they will ask what they need to do in order to convince them that the pay plan is worth approving," he says. "The failure of the Citi group board to understand the vote and plan for it is one of the most striking developments here."

For its part, Citi appears to already be learning its lesson on this count. Citigroup Chairman Dick Parsons responded by calling the vote "a serious matter" and saying he would engage with shareholders.

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