Citibank and Say on Pay: A Metaphysical Analysis

Shareholders at Citibank rejected the compensation package submitted under the mandatory requirement of say on pay.  Say on pay is an advisory vote by shareholders that was mandated by Dodd-Frank.

The vote gained attention for a number of reasons.  First, it is only the third rejection this year.  Second, it is the first time a major financial institution has experienced a negative vote (the only other bank was Key Bank back in 2010).  Mostly, though, the attention arose because the outcome was essentially unexpected.

Total compensation for Pandit, the CEO at Citigroup, was just shy of $15 million.  That was nothing like the eye popping total compensation paid to the CEO of Apple (he received stock worth close to $400 million) or even the $69.9 million paid to the CEO of CBS.  Moreover, the amount paid to Pandit comes after he received only $1 in the prior year.  Moreover, the amount was not out of line with some other financial firms (Goldman, for example, listed the total compensation for its CEO at $16.1 million).  The amount alone, therefore, does not seem to explain the revolt.

What about share prices?  Citigroup is up since January and down since this time last year.  But on the whole, the drop over the last twelve months has been in the vicinity of 10% (although share prices have fluctuated).  Moreover, the price in late November was in the mid 20s and has since climbed back to the mid 30s.  In other words, the change in share prices does not really explain the no vote. 

Another way to look at the rejection by shareholders is to remember that under say on pay, the company submits not the CEO's compensation, but the compensation required to be disclosed under Item 402 of Regulation S-K.  This requires disclosure of the total compensation for the CEO, CFO, and top three highest paid officers.  In other words, shareholders were really voting on a cluster of compensation packages.  In that regard, the company paid out about $20 million in cash bonuses to the five officers.  Moreover, while Pandit had total compensation of about $15 million, three of the other officers received total compensation in excess of $10 million.  Perhaps some of the unexpected opposition, therefore, came from the rich nature of the compensation package to the five officers. 

But still, this does not seem to be the entire explanation.  Instead, the explanation seems to be more metaphysical.  Citigroup, along with the other large financial institutions, is still suffering from its perceived role in the financial crisis.  Recall that Citigroup had to take massive bailouts from the government during the TARP era.  To the extent having contributed to the crisis and having survived in part because of a government bailout, the Bank has a serious image problem with the public and with shareholders.  It is not helped by the actions brought by regulators over its pre-crisis behavior that involve Citigroup

In short, the traditional compensation analysis for Citigroup does not apply.  As long as Citigroup has a serious image problem, particularly at a time when the economy remains weak, compensation decisions are viewed through the filter of a broader notion of fairness.  This is not fairness in the legal sense. Pandit may have worked very hard last year and he certainly was not overpaid the prior year.  It is fairness from a social perspective.  And application of that kind of fairness suggests that the award of more than $14 million in total compensation, given all of the other factors, looks very unfair.  

J Robert Brown Jr.