nonperformance

Citi's executive pay giveaway

February 23, 2011: 1:08 PM ET

Leave it to Citigroup to take Wall Street's money grab to new heights.

Citigroup (C) this month instituted a handy new compensation plan that will enrich CEO Vikram Pandit's top four lieutenants. Under the so-called Key Employee Profit Sharing Plan, Citi execs can earn between $1.7 million and $5.2 million -- assuming the bank and its top leaders can hit performance and conduct targets that are roughly as big as the side of a barn.

Citi takes aim

Citi said in a Securities and Exchange Commission filing last week that the plan is "intended to preserve and incent the company's management team," via a revenue-sharing plan. This sounds like a fine idea, linking pay to performance for the sake of aligning management's interests with those of shareholders and that sort of thing.

But in the proud tradition of rivals like Goldman Sachs (GS), what Citi is actually doing here is moving the goalposts in so that executives can collect on their incentive pay even if they boot things rather badly in the next couple years. Not that that ever happens at Citi.

Citi operating chief John Havens, finance chief John Gerspach, consumer banking head Manuel Medina-Mora and top overseas exec Alberto Verme can get their payouts if Citi makes $12 billion in pretax income over the next two years.

That sounds like a lot of money. But it is actually below the $13.2 billion in pretax income from continuing operations that Citi posted in 2010 alone. And though that's clearly an improvement from Citi's recent red ink-stained performances, you can hardly make the case that Pandit & Co. were knocking the cover off the ball.

JPMorgan Chase (JPM) earned $24.9 billion before taxes in 2010 – almost twice as much as Citi -- on an asset base that is just 15% bigger.

As low as Citi plans sets the financial bar, the bank manages to lower it again with the other boxes execs must check off before they can collect their easy millions. For the fabulous four to get paid, Citi's chief risk officer can't determine there has been a material adverse change in the bank's condition. What pressure.

And consider the humble clawback, emphasis in this case on humble. Execs will have to give some of the money back if they:

  • got money "based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria,"
  • "knowingly engaged in providing inaccurate information relating to financial statements or performance metrics," or
  • "materially violated any risk limits ... or any balance sheet or working capital guidance provided by" senior management, risk management or a business head.

Wow, talk about laying down the law.

Accordingly, Citi skeptics weren't impressed. "We are unsure if it properly aligns the interests of senior managers and shareholders," writes CLSA analyst Mike Mayo, who rates the stock sell.

Naturally, this is not how Citi sees it. This is its statement:

The profit-sharing program further aligns compensation with the long-term performance of Citi. It balances incentives and risk to align executives' interests with those of Citi's stockholders with the goal of incenting and retaining Citi's management team.  Executives in the risk function at Citi are not eligible for these awards.

And in a neat bit of symmetry, the executives who are eligible for the awards are not taking on any risk. Pay for nonperformance, thy name is Citigroup.

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