TOPICS > Economy

Citigroup Shareholders Assert Say Over CEO’s Pay

April 18, 2012 at 12:00 AM EDT
Shareholders publicly rebuffed Citigroup Tuesday at an annual meeting, rejecting a $15 million CEO pay package. Margaret Warner discusses the implications amid a national debate over income equality with Anne Simpson of the California Public Employees' Retirement System and Russell Miller of Clearbridge Compensation Group.
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JEFFREY BROWN: Now, a rare move by shareholders to rebuff company executives over compensation.

Margaret Warner has our story.

MARGARET WARNER: Shareholders delivered a loud message at Citigroup’s annual meeting in Dallas yesterday.

They voted to reject a nearly $15 million pay package for CEO Vikram Pandit. The bank’s board of directors already voted to award Pandit the money for 2011, but as part of the Dodd-Frank law on financial regulation, public companies now must offer a say on pay vote to their shareholders at least every three years.

Like many banks, Citi has struggled in recent years. It got a $45 billion bailout loan from the Treasury during the financial crisis, but has paid it all back, and now is profitable.

We look at what was behind the vote and what happens now with Anne Simpson, director of corporate governance for CalPERS, the California state pension fund. It holds 10 million Citi shares and voted against the pay package. And Russell Miller, founder and managing director of ClearBridge Compensation Group, which advises companies on executive pay.

What shareholders are saying is, we're OK with executives being paid well if the performance is there. Where we have concerns are those in many cases -- it's really the outliers.Russell Miller, Clearbridge Compensation Group

We invited Citi to appear, but the company declined our invitation.

For the record, Citi is a NewsHour underwriter.

And welcome to you both.

Anne Simpson, so explain the vote of CalPERS. Why did you vote against this pay package?

ANNE SIMPSON, director for corporate governance, CalPERS: It was a simple vote. We rejected the proposal because Citi has not demonstrated that they’re making awards of performance pay for long-term performance, and that’s what we as the owners really need to see.

MARGARET WARNER: So are you saying the amount of money was too big or you don’t like that way the compensation package is structured?

ANNE SIMPSON: It’s — we’re share owners. We’re not management. It’s not our job to nickel-and-dime individual amounts.

But what we want to see is full transparency. That’s the first thing. We need to understand what’s going on with pay. And we also need to see that performance targets are anchored to the long term. And that information was simply missing.

And, remember, Mr. Pandit joined as chief executive at Citi. The share price then was something on the order of $340 per share. When I looked yesterday afternoon, it’s hovering just over $35. So because we’re long-term owners, we’re still looking not at just what’s happened since the financial crisis. We’re really looking ahead. That’s our focus.

MARGARET WARNER: Russell Miller, turning to you, the bank had offered a rationale for this pay. What was the rationale and did it relate to some of the issues that Ms. Simpson just raised?

RUSSELL MILLER, ClearBridge Compensation Group: Yes, thank you.

It does relate. The first thing I think that’s important to recognize is Citigroup, like many and most companies now in the current environment with the shareholder vote, are certainly aiming to design their pay programs so that the payouts for CEOs and other members of management do correspond with the underlying performance of the company.

And that was exactly Citigroup’s rationale in this case as well. Their point of view as described in their proxy was that they believe that Citigroup had strong performance for 2011, and, even more importantly, they believe they have established a strong foundation for continued growth of the company.

MARGARET WARNER: They also pointed out that, at least in terms of salary, Mr. Pandit took just a dollar a year in 2009 and 2010. Didn’t they make a point of that?

RUSSELL MILLER: They did. They recognized that his base salary was a dollar a year in the prior years, although there was no indication, no suggestion that this was intended to be any type of makeup.

This was really viewed as, we want to recognize the company’s turnaround, the company’s performance, and the CEO, Mr. Pandit, who’s led us there. They also recognized that they were one of the companies that received government funds and that they fully paid back the government, and that there was what appears to be, at least among the board, certainly within the company, a view that the performance was strong and it supported the payouts that they determined for Mr. Pandit.

MARGARET WARNER: Anne Simpson, back to you.

Shareholders, even since this Dodd-Frank law has gone into effect, they rarely vote against pay packages. Why do you think it’s happened now? And how much did this new legislation, this new law, have to do with it?

ANNE SIMPSON: Well, the new law has everything to do with it because if share owners are not asked their views, it’s impossible to gauge.

We have not had the ability to vote on the policy on compensation in the United States. That rule’s been around for a long time in other places like Australia, the U.K., Norway. We have not had it in the United States. So that came in for the first time last year, and admittedly this was quite new. Investors were working out how to use it. Is this a nuclear attack? Is it just a feather duster? What signal are we sending?

And I think what we’re seeing now is that investors, the majority of investors have got well-thought-through frameworks for looking at long-term targets, and, also, I think in the banking sector particularly, being concerned that there is a robust risk strategy that wraps around the returns, because we know chasing short-term returns was one part of the reason the financial crisis took us to the edge.

MARGARET WARNER: Back to you, Mr. Miller.

So, one, do you agree that Dodd-Frank, that that law, that provision is having a major impact, and that it is, as Ms. Simpson suggests, going to be broader than just Citigroup?

RUSSELL MILLER: No question that the Dodd-Frank Act and the specific provision that allows for shareholders to have a say on pay and take an active vote and express their views has been a significant step in this direction.

It’s given the shareholders the opportunity to directly say whether they support or don’t support what the boards are doing as it relates to executive compensation programs. Also, what we’re seeing as a result of these votes, while they’re nonbinding, boards are taking these votes very seriously. And we are seeing changes as a result.

MARGARET WARNER: Well, so back to you, Ms. Simpson. Now, what do you actually expect to happen here? Because I hadn’t realized this when I first heard the news yesterday, but this is a pay package that wasn’t only voted on last year, but a lot of it was paid last year.

Are you — what are you looking for the board of directors of Citigroup actually to do with this vote?

ANNE SIMPSON: Well, we don’t have the ability to rewrite history.

What the board has done, the board has done. We have to be looking forwards. We’re long-term owners. We’re going to be around for a very long time. Advice to the board is, it’s time to roll up your sleeves, go back to the drawing board and come back to shareholders with long-term performance targets, risk-adjusted, that really make sense.

MARGARET WARNER: And so, Mr. Miller, to you. So the idea of — well, first of all, explain how this — if you can, the pay was — briefly, was structured. How much of it has already been paid and do you see a prospect of any kind of clawback?

RUSSELL MILLER: So it’s interesting because the pay was structured — the $15 million that he was — quote, unquote — “paid for 2011,” of that, only about $7 million of the $13 million — of the $15 million was paid in 2011 or early 2012.

The balance of it, about $8 million, is actually deferred over the next four years and will be subject to clawbacks or reductions depending on performance over the next four years. But, ostensibly, the intent is to deliver that $15 million to him over that time frame.

MARGARET WARNER: So one final thought from each of you, very briefly.

How much of this, do you believe — and, Ms. Simpson, I will begin with you — was also affected by the general national debate that’s been going on for now a year about both inequality — income inequality and executive pay?

ANNE SIMPSON: The United States celebrates success. That’s a great feature of American culture.

And, therefore, if there’s any complaint about pay, it’s because performance has not matched up. Pay for performance is understood — pay for failure or pay for underperformance, no.

MARGARET WARNER: Brief final thought for from you, Mr. Miller?

RUSSELL MILLER: Yes. I have to agree that what we’re hearing from shareholders when we look back at 2011, the votes, where less than 2 percent of companies got a failed vote like we saw with Citigroup this year, we’re trending on the same level for 2012.

Clearly, what shareholders are saying is, we’re OK with executives being paid well if the performance is there. Where we have concerns are those in many cases — it’s really the outliers. We’re talking about less than 2 percent of the companies where the pay doesn’t appear to be aligning with the performance and shareholder interest.

MARGARET WARNER: All right, Russell Miller and Anne Simpson, thank you both.

ANNE SIMPSON: Thank you.

RUSSELL MILLER: Thank you.