(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Antony Currie
NEW YORK, Feb 22 (Reuters Breakingviews) - Citigroup's (C.N)
new executive pay plan raises the bar, just not quite far
enough. The bank's board has implemented a compensation scheme
with more rigorous targets for Chief Executive Michael Corbat
and his lieutenants. One important performance metric, however,
keeps expectations too low.
It took a shareholder revolt to force Citi to act in the
first place. Egregiously easy ambitions set for then-boss Vikram
Pandit led to 55 percent of the mega-bank's shareholders voting
against the plan at last year's annual meeting. It left Chairman
Dick Parsons retiring on a low note.
Pandit was to receive $10 million simply for ensuring risk
management was sound, promoting a culture of responsible finance
and developing a good team. He was due at least $6 million more
if pre-tax earnings at Citicorp, the bank's core operations,
totaled $12 billion between 2011 and 2012 - a 60 percent drop
from 2010. They weren't exactly the sort of goals that inspire
Under the new plan, executives must meet hard financial
targets for the operations they oversee - including revenue, net
income, operating efficiency and return on Basel III capital -
to earn a bonus. Thirty percent of the payout will be delivered
in the form of performance share units that can only be cashed
in if Citigroup hits certain hurdles on both return on assets
and total shareholder returns.
While the broad structure looks good, certain thresholds
don't. The return on assets target of 0.85 percent is more than
double the 0.4 percent achieved last year. Strip out one-off
items like accounting hits and restructuring charges, however,
and the return was 0.64 percent.
The drag from Citi Holdings, which houses the assets the
bank is trying to unload, will keep shrinking. Assume $30
billion a year goes through 2015. All else being equal, apply
that to the Thomson Reuters consensus forecasts for net income
and voilà, the 0.85 percent hurdle is met.
Of course, the return on assets counts for naught if total
shareholder returns don't beat half the board-appointed peer
group of eight big banks. It's just that at this stage Citi and
its shareholders ought to expect better.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Citigroup unveiled on Feb. 21 that its board of directors
has adopted a new structure for determining executive pay.
Compensation "will be determined based on pre-defined
performance goals established at the beginning of the year,"
according to an official filing with the Securities and Exchange
Commission. This replaces the previous structure "which, as is
common practice in the financial services industry, involved a
high degree of discretion."
- Executive compensation will be based on revenue,
profitability, return on assets, operating efficiency, Basel III
capital accumulation and return on Basel III capital.
- Beyond that, 30 percent of bonuses determined by those
metrics will be paid in the form of performance share units.
These will be earned according to the bank's return on assets
and total shareholder return over the three-year period between
2013 and 2015.
- To receive the full award of performance share units,
executives will have to ensure Citi earns a return on assets of
0.85 percent and posts total shareholder returns in the top half
of its peer group. Asset returns above 1 percent and belonging
to the top quarter of peers on total shareholder return will
result in executives earning 150 percent of the units.
- The peer group for assessing total shareholder returns is
Bank of America (BAC.N), Barclays (BARC.L), Deutsche Bank
(DBKGn.DE), Goldman Sachs (GS.N), HSBC (HSBA.L), JPMorgan Chase
(JPM.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N).
- Citi SEC filing: link.reuters.com/new26t
- Reuters: Citigroup bows to shareholder pressure, overhauls
pay [ ID:nL1N0BLBRJ]
An incentive to succeed [ID:nL1N0BKAET]
Payback time [ID:nL2E8FHAGM]
- For previous columns by the author, Reuters customers can
click on [CURRIE/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
Keywords: BREAKINGVIEWS CITI/
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