This is what’s really behind the fuss about Pandit’s excessively generous pay

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Low hurdles for Vikram

Nice low hurdles for Vikram

Suddenly, Vikram Pandit pay be less well off than he’d anticipated. Having had his salary increased from $1 to $1.8m on January 18th 2011, he was theoretically in line for a payment of $15m, plus multi-year incentive compensation of $40m, as detailed in the letter Citi sent to its shareholders before this year’s annual meeting.

 

Needless to say, Pandit’s pay package has not been well received. 55% of the bank’s shareholders rejected it.

 

Here, briefly, are the curious details of Citi’s executive compensation proposals and Vikram's goals didn't look too onerous.

 

1. Deferred stock

 

Pandit was awarded deferred stock with a market value of $10m vesting over three years.

 

The stock’s vesting would be dependent on the achievement of ‘non-specific financial goals.’ These goals included: regulatory considerations and risk; a responsible organizational culture (the letter reveals that Citi has already instituted an ‘ethics hotline’); and talent development (Eg. succession planning, nurturing senior managers etc. etc.).

 

Pandit’s stock would have vested in equal tranches between now and 2015 and before each tranche vested, the executive compensation committee would have sat down to contemplate whether these goals had been met. If they weren’t, Pandit would have had to forfeit his stock. The stock could be clawed back in its entirety until 2015.

 

2.  An extremely lenient profit target for Citi’s executives

 

The real fuss about Pandit’s pay relates to the: ‘Key Employee Profit Sharing Plan Award.’

 

The KEPSPA will result in Citi’s executives being paid if: “cumulative pre-tax income,” hits a certain level for a two year period (2011-2012).

 

Cumulative pre-tax income is defined as: ‘the income (loss) from continuing operations before taxes of Citigroup Inc, minus the income (loss) from continuing operations before taxes of Citi Holdings.”

 

Cumulative pre-tax income must hit at least $12bn.

 

If Citi makes $12bn in cumulative pre-tax income, Pandit will get two thirds of his award on May 17th 2013 and one third on May 17th 2014. In total, Pandit stands to receive $40m from all his deferred payments.

 

The problem here is that Pandit’s KEPSA target looks really rather lenient. In 2011, Citigroup’s income from continuing operations before taxes was $14.6bn. The loss at Citi Holdings was $3.7bn. In 2011 alone, therefore Citi’s cumulative pre-tax income was $10.9bn. In 2012, Pandit et al would need to make sure Citi earned…$1.1bn.

 

3.  Weird clawback

 

Finally, Citi was proposing a weird clawback for its executives.

 

While Deutsche will clawback all of an individual’s stock if either the bank as a whole or the individual’s division makes a loss, Citi will only claw back its deferred cash awards by a fraction in the event of a loss.

 

That fraction will be determined by: the pre-tax loss divided by the highest level of pre-tax profit achieved by Citi in the three years previously.

 

Arguably, this creates a perverse incentive not to make big profits.

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