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Citigroup Inc shareholders have rejected its executive pay plan, a first among the six largest US banks, amid criticism it lets Chief Executive Officer Vikram Pandit collect millions of dollars in rewards too easily.
About 45 per cent of the votes favoured the plan, which Citigroup had said will attract and retain top talent, according to a preliminary tally at the New York-based firm's annual meeting in Dallas yesterday. While the vote isn't binding, outgoing Chairman Richard Parsons said changes will be made.
"That's a serious matter," Parsons said during his final Citigroup shareholders' meeting as chairman. The board will seek a more quantitative, formula-based method for setting top executives' pay, he said in a subsequent interview. "We're going to have some more conversation with our shareholders, make sure we understand their concerns and then fix it," he said.
The rejection is a rarity for companies in the US, which temporarily imposed pay curbs on financial firms as part of the industry's $700 billion taxpayer bailout in 2008.
While new rules require "say-on-pay" votes, only 41 firms in the Russell 3000 Index failed last year to win a majority for executive pay plans, according to Ted Allen, a spokesman for ISS Proxy Advisory Services. Just three have been rejected this year, none of them at banks, Allen said.
The vote is another blow for Pandit, following last month's rejection by the US regulators of his capital plan that included rewards for shareholders, possibly including a higher dividend. Directors had awarded Pandit, 55, about $15 million in total compensation for 2011 and also granted him a separate, multi-year retention package that may be worth $40 million. Citigroup shares slumped 44 per cent last year.
"Many investors have mentioned to me that they feel the incentive compensation at Citigroup is ludicrous, that there's an artificially low hurdle," said Mike Mayo, an analyst at CLSA in New York, who rates the bank's shares "underperform." "Are you going to give the manager of the New York Yankees an incentive bonus if he wins one-third of his games?"
Pandit's proposed payout included a $5.33 million cash bonus, more than the $3 million cash bonus that Goldman Sachs Group Inc directors awarded to CEO Lloyd Blankfein for 2011. Morgan Stanley directors didn't give one to CEO James Gorman.
Parsons was a member of the board's personnel and compensation committee that decided on awards for Pandit and other executives, according to a filing. The board didn't award Pandit too much money, he said.
"No, I don't think it's really about that," he said in an interview as he walked through the Hilton Anatole hotel after the meeting. "We think that there was a breakdown in terms of communication in terms of how our shareholders understood it, looked at it."
Former Alcoa Inc CEO Alain Belda led the committee before he and Parsons retired from the board yesterday, an annual filing shows. Other members included new Citigroup Chairman Michael O'Neill, William Thompson Jr and Diana Taylor. Taylor is the companion of New York City Mayor Michael Bloomberg, the founder and majority owner of Bloomberg News parent Bloomberg LP.
Citigroup accepted $45 billion from US taxpayers to help it survive the financial crisis. The firm has since repaid the entire sum. Banks that took money from the Treasury Department's Troubled Asset Relief Programme in 2008 and 2009 were required to put a say-on-pay vote before shareholders, said Eleanor Bloxham, CEO of the Value Alliance Co, a board advisory firm in Westerville, Ohio.
The Dodd-Frank Act, passed in 2010, requires such votes for all companies, she said.
The only large bank to have a compensation plan rejected by shareholders was Cleveland-based KeyCorp in 2010, she said. According to KeyCorp's 2011 shareholder letter, the company subsequently reduced pay for then-CEO Henry L. Meyer III to $4.5 million from $5 million.
ISS and its competitor, Glass Lewis & Co., faulted Pandit's payouts and recommended that investors reject the bank's executive compensation plan for 2011. Pandit got more than Stuart Gulliver, CEO of HSBC Holdings Plc (HSBA), the London-based lender that made more money than Citigroup in 2011 and posted a smaller share drop.
"Pandit's 2011 incentive pay and multiple retention awards are substantially discretionary in nature or lack rigorous goals to incentivise improvement in shareholder value," analysts for ISS, a unit of MSCI Inc., wrote in their report.
The vote also may affect payouts for other Citigroup executives. Chief Operating Officer John Havens received about $13 million for 2011, including a $5 million cash bonus. He oversees the securities and banking division, which posted a 24 percent slump in revenue last year.
Manuel Medina-Mora, consumer-banking chief, received about $11.4 million, including a $4.2 million cash bonus. Profit at the consumer-banking unit jumped 33 percent to $6.2 billion in 2011, compared with the prior year.
"Bankers historically have very short memories and we continue to see examples of banks fighting to get back to the more traditional ways of banking pre-crisis, including outsized compensation," said Todd Hagerman, an analyst at Sterne Agee & Leach Inc. who has a "buy" rating on Citigroup shares. "It's simply amazing how many bankers fail to recognise the profound structural changes taking place in the industry."
More than 150 people attended the annual meeting in addition to the board members and senior executives. All other management proposals passed with more than 80 percent of votes cast, including the election of directors, according to Citigroup Secretary Michael Helfer.
Parsons, 64, joined the Citigroup board in 1996 and helped it become the world's biggest bank, before it almost collapsed in 2008. He became chairman in 2009 and presided over repayment of the company's U.S. bailout. His replacement, O'Neill, 65, takes over in the wake of the Fed's rejection of the bank's capital plan.
The Fed didn't accept Citigroup's proposal after finding it would cause the company's capital levels to fall below minimum standards in a dire economic scenario. Pandit affirmed yesterday that the lender may wait until it submits a 2013 plan to the Fed before seeking approval to boost the 1-cent quarterly payout or repurchase shares.
"Creating shareholder value and also making sure that's reflected in our book value is our No. 1 goal," Pandit said yesterday. Returning some of that value is a priority, he said, whether it's a dividend or a share buyback.
Parsons is leaving a board he described at the meeting as the best of any financial firm. Shareholders should be "pleased and grateful" for the directors they have, he said.
"We leave confident that the place is in pretty good shape and in pretty good hands," he said, as he left the hotel through a rear exit.