Bank boards have been under pressure lately to do a better job of paying their top executives. There has been a lot of handwringing about getting the appropriate mix of incentive pay and salar in order to produce maximum benefits for shareholders.
In the case of Citigroup, at least one critic--none other than Phil Angelides, the chair of the Financial Crisis Inquiry Commission (FCIC)--contends that the board has done a terrible job. Pandit's package "awards him ‘incentive' pay of at least $6.65 million if Citigroup's pre-tax earnings for 2011 and 2012 hit $12bn--well below the $20bn the bank made in 2010 alone. That excludes losses from Citi Holdings--‘the bad bank' created to hold troubled assets earmarked for sale. The 500,000 options granted Mr. Pandit offer many benefits, and no drawbacks, for taking big risks."
The comentary continues: "Most remarkably, given Citigroup's history, the plan contains a hollow clawback provision if the bank goes upside down. It doesn't even require the return of compensation already received if Mr. Pandit gets a payment or award based on materially inaccurate financial statements, knowingly engages in providing inaccurate information related to financial statements, or materially violates risk limits. If he does any of those things, he merely forfeits future pay, stock grants, or unvested or unexercised options."
The reality here is that Citigroup's executive compensation plan is the norm these days. And the norm is pretty much in line with historical practices--a large salary plus restricted stock plus lots of options--to align shareholders with executives. I can't see this changing, for better or worse. But forward thinking boards would be wise to take Angelides advice on stronger clawbacks. It's the least they can do.
- here's the commentary in the Financial Times