In a surprising rebuke to Citigroup's board and management, shareholders effectively said April 17 that the bank is paying its top people too much.
Specifically, a majority of investors voted at Citi's annual meeting to reject the bank's compensation plan for top executives. Though the vote is nonbinding—meaning Citi is under no obligation to act—it sends a clear message of how angry investors are over the $15 million pay package awarded to Chief Executive Vikram Pandit last year while Citi's earnings from continuing operations rose by only 1 percent and its stock price sank by nearly half. Citi's five most senior executives were collectively awarded $58 million last year, or 80 percent more than in 2010.
Citi is the first big bank to see its pay practices rejected since Cleveland-based KeyCorp in 2010. Under the Dodd-Frank reform law, large companies are required let their shareholders vote on compensation matters in elections known as say-on-pay. Many activist shareholders believe the votes can provide a useful way for investors to register their displeasure and pressure companies into changing the way they compensate their top people.
In a statement, Citi said it would take the message from investors into account.
"Citi's board of directors takes the shareholder vote seriously, and along with senior management will consult with representative shareholders to understand their concerns," the bank said. "The personnel and compensation committee of the board will carefully consider their input as we move forward."
About 25 companies saw their pay practices rejected last year, according to consulting firm Cogent Compensation Partners, including Hewlett-Packard and Beazer Homes USA. The only bank that saw its pay plan nixed in 2011 was Umpqua Holdings, a $12 billion-asset institution based in Oregon that has since taken steps to more closely link executive pay with its stock price.
Citi's pay practices were subject of an article last month in Crain's New York Business that examined how the bank increased its top executives' compensation, in part by subtly moving the goalposts. The bank stopped basing compensation decisions on what fellow struggling global banks like Barclays or UBS paid their senior executives and started looking more closely at pay within much healthier competitors such as American Express and Wells Fargo.
By tweaking its peer group of banks, Citi was able to put itself in the company of more generous companies and justify paying its top people more.
Influential proxy advisory firms ISS and Glass Lewis recommended investors reject Citi's 2011 executive compensation plan. ISS, according to Bloomberg, said the package awarded Pandit was "substantially discretionary in nature or lack[s] rigorous goals to incentive improvement in shareholder value."