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After Losing Billions, Citigroup May Revamp Executive Pay

July 1, 2008
Related Topics: Compensation Design and Communication, Corporate Culture, Workforce Planning, Latest News
After losing billions of dollars as a result of the credit crunch, investment banks are starting to take a fresh look at their compensation and bonus structures.

Citigroup may be the latest financial firm to try to rethink pay packages to counteract the focus on short-term profits on Wall Street.

According to a story in the Financial Times on Monday, June 30, Citigroup CEO Vikram Pandit is trying to reduce the incentives for the bank’s managers to take short-term, risky bets, primarily by tying bonuses to the financial health of the entire bank, rather than the profitability of each division and the success of the individual.

The move is expected to tear down walls between Citi’s investment banking and commercial banking divisions and maximize its “universal banking” model, the newspaper reported.

Calls to Citigroup were not immediately returned.

Experts say Citi is likely considering this move to head off concerns about the bank’s various divisions being split off. However, the “united we profit, divided we shrink” strategy may catch on among competitors, some say.

Independent compensation consultant Bruce Ellig said Wall Street firms will need to follow Citi’s lead and change how they pay their executives, given the major write-downs financial firms have taken over the past year.

“How can they sustain huge losses and keep paying out the big bucks?” he said.

Citi’s proposal may be viewed as the measuring stick for other bank pay package redesigns, especially if it includes ceilings or floors for compensation based on how a bank’s overall business fares, said Ellig, who last year authored a guidebook on executive compensation. For example, a bank could tie bonuses to both the success of an employee’s division and to the bank’s overall financial health, he said.

Such changes may not be long-standing, though.

“No company keeps its bonus system the same each year,” said Don Delves, a Chicago-based compensation consultant and president of the Delves Group.

He noted that in the past, companies have toggled back and forth between silo-type bonus systems in which compensation is based on the division’s performance and holistic systems in which compensation reflects the company’s overall performance.

“There’s no right answer,” Delves said.

Morgan Stanley was one of the first on Wall Street to try to eliminate short-term thinking among its executives by revamping pay.

Earlier this year, its compensation committee approved a new performance-based stock option program in which executives would need to meet certain thresholds during a three-year performance period to receive option compensation. That replaced a system in which all awards were restricted stock.

Morgan Stanley’s change was a “step in the right direction,” but the Citi proposal does not address the focus on short-term earnings—some have blamed this for helping cause the current crisis—that has enveloped certain financial services firms, according to Paul Hodgson, a senior research associate for the Corporate Library.

Still, Hodgson and others predict banks will try to tie executive compensation more closely to long-term return on equity, following the hue and cry from unions, investor advocates and other groups that have targeted what they consider to be unfair pay packages at Wall Street firms.

If financial firms don’t make the changes themselves, Congress may act for them. The House Oversight Committee, led by Rep. Henry Waxman, D-California, has been probing the pay packages of Wall Street executives.

Last March, Waxman conducted a hearing at which he questioned whether the severance packages given to bank CEOs such as Stanley O’Neal and Charles Prince were warranted, especially in light of the multibillion-dollar losses and double-digit percentage decreases in share value at those firms.

Nell Minow, editor of the Corporate Library, testified during that hearing that “there is an obvious disconnect between the performance of these CEOs and the compensation they received,” noting the risky strategic decisions at those banks that led to major investor losses.

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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