May 28 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit weathered almost six hours of grilling from shareholders at the bank’s annual meeting on April 21. He had a lot of explaining to do: The company lost $27.7 billion in 2008 and stayed afloat only with help from a $45 billion government bailout.

Even as his bank was floundering, Pandit in 2008 earned $38 million in salary and stock, No. 3 among the best-paid CEOs of the top 50 U.S.-based financial companies, according to data compiled by Bloomberg. In February, Pandit told a congressional committee that, starting in 2009, he would take just $1 in annual salary until the bank is profitable again. “I get the new reality,” he said.

In the question-and-answer session at the annual meeting, one investor joked, “If you come work for me, I’ll double your salary.” Pandit, 52, standing onstage with Citigroup Chairman Richard Parsons at the Hilton New York, bristled. “I don’t want to work for you,” he said and changed the subject.

Never has pay been a more sensitive topic for the chiefs of large financial institutions. The global economic crisis, last year’s series of taxpayer-supported bailouts and a series of tense congressional hearings have made executive compensation a daily focus of the network news.

“This attack on executive pay is more severe than previous ones,” says Samuel Hayes, professor emeritus of investment banking at Harvard Business School. “The severe economic decline is being blamed squarely on Wall Street, and the huge pay packages are seen as an outrage.”

Blankfein No. 1

Lloyd Blankfein, CEO of New York-based Goldman Sachs Group Inc., was No. 1 in the ranking after earning $42.95 million in salary and stock awards. The ranking includes CEOs who held their jobs for at least 10 months in 2008 (How We Crunched the Numbers). Kenneth Chenault, CEO and chairman of American Express Co., was No. 2, with total pay of $42.75 million. Chenault’s pay package included $8.57 million in salary and other direct compensation, with the rest paid in stock options and restricted shares.

Chenault, who has run New York-based Amex since 2001, topped a ranking of financial CEOs providing the least value for the money they earned, according to Bloomberg data. That ranking is based on Amex’s stock return for 2007 and 2008 -- down 69 percent -- combined with Chenault’s pay over the same period per million dollars of corporate assets.

Some of his 2008 pay, and that of other financial CEOs, was in stock options that are underwater -- meaning the stock price as of today was lower than the price at which they were issued.

Buffett’s Value

The financial executive providing the most value for the money was Warren Buffett, CEO and chairman of Omaha, Nebraska- based Berkshire Hathaway Inc., 58 percent of whose assets are in insurance. Buffett paid himself an average of $175,000 a year in 2007 and 2008 and was awarded no bonus and no stock options.

He owns 33 percent of Berkshire’s Class A shares, which were valued at $31.5 billion on May 27.

Berkshire Hathaway was the single biggest holder of Amex stock as of March 31, with 13 percent of the shares outstanding.

Buffett, 78, blames out-of-control executive pay on boards of directors who accede to CEO demands for multimillion-dollar compensation packages.

“Half of the directors I’ve met on corporate boards don’t know anything about business,” Buffett told shareholders during Berkshire’s annual meeting in May. “They are not going to do anything that not only gets them kicked off that board but that reduces their chances of getting on another one.”

Up to Boards

Ultimately, it will be up to corporate boards, not the government, to put controls on executive pay, and it is by no means clear that they are willing to do so, says Stephen Davis, a senior fellow at the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

“There’s a real question as to whether what we’re seeing is for show in the middle of a crisis, or is part of a long-lasting change,” Davis says. “What would really show that boards are serious is if they have dialogue and outreach with their shareholders, and there’s little sign of that so far.”

Davis is also principal of Madison, Connecticut-based consulting firm Davis Global Advisors.

Mark Borges, a principal at Compensia Inc., a San Jose, California-based pay consultant, says there was never a better opportunity for boards to take strong action to rein in pay. “But I don’t think it’s realistic to say it’s all going to turn on a dime,” he says. “It will depend on the backbone and gumption of the board compensation committees, and that will depend a lot on personalities.”

Denying Bonuses

Pay for financial executives became a public issue the moment in October 2008 that then-Treasury Secretary Henry Paulson decided to make a direct investment in the biggest banks. In that month, the Treasury paid $125 billion to buy preferred shares in nine U.S. banks under the Troubled Asset Relief Program. The total number of TARP-assisted banks eventually swelled to almost 600.

In February of this year, President Barack Obama signed a $787 billion economic stimulus bill, one section of which deals with compensation of TARP beneficiaries. It denies bonuses to the top five best-paid executives at banks that get $500 million or more in bailout funds and to the 20 next-best-paid employees at those firms.

Employees can receive long-term restricted stock if the value isn’t more than one-third of their total compensation.

The law also imposes a ban on TARP banks making “golden parachute” exit payments to the five highest-paid executives or any of the next five best-compensated employees. A golden parachute is defined as any payment -- except for those covering services performed or benefits accrued -- to a “senior executive” leaving a TARP-funded company for any reason.

‘Wink and Nod’

It’s unclear whether the law covers only executives or also other highly paid employees such as traders, says Alan Johnson, managing director of New York-based compensation consulting firm Johnson Associates Inc. Johnson says the Treasury may leave the rules deliberately vague to give companies some flexibility on pay.

“I think the Treasury would love to do a wink and a nod,” he says.

In mid-May, four executives of financial companies told Bloomberg News they expect the administration to loosen the pay restrictions. One said they would disappear by year-end.

Even so, Treasury Secretary Timothy Geithner told Bloomberg TV on May 21 that the Obama administration was formulating a plan to better align pay with performance and would roll it out within weeks. He said Wall Street must adopt a broad set of standards to discourage the kind of risk taking that led to the financial crisis.

‘Substantial Changes’

“I don’t think we can go back to the way it was,” Geithner said. “We’re going to need to see very, very substantial changes.”

In an April survey of 2,326 people by Hamden, Connecticut- based Quinnipiac University, 81 percent of those polled supported restrictions on pay at companies receiving government aid, and almost one-third also backed limits at other firms.

Scrutiny of their compensation and perks by the White House and Congress has some banks scrambling to pay back the TARP money.

“Firms want to send a signal to their customers that they’re healthy and prosperous and not have the pay restrictions,” Johnson says. “They don’t want the perception or reality of government interference in business decisions.”

JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs all applied to refund a total of $45 billion to the Treasury in mid- May, people familiar with the matter say.

Paying Back TARP

“We’re very well capitalized and expect to repay the TARP money soon,” Blankfein told shareholders at the company’s May 8 annual meeting. Goldman sold $10 billion in preferred shares to the Treasury in October.

Overall, pay for the highest-ranking financial executives is dropping. Average compensation for the Finance 50 CEOs who were in their jobs throughout 2007 and 2008 fell 25 percent in 2008 to $9.8 million from $13 million a year earlier, according to Bloomberg data.

Even as the captains of Wall Street lose millions of dollars in compensation, they’re paying to keep the employees they see as revenue producers. Goldman Sachs designated $4.7 billion in compensation expenses for the first quarter of its fiscal year, or more than $168,000 per employee, up from $125,000 for the same period a year earlier. Those numbers don’t precisely reflect what each worker receives because they include items such as severance costs and amortization of stock awards.

Poor Performance

The CEOs of the top 20 financial companies in the ranking all chalked up pay packages in excess of $10 million, in a year when the performance of their commercial and investment banks and insurance companies was uniformly poor.

“The disparity between pay and company performance is as large as I’ve seen in my 33 years in this business,” says Frank Glassner, managing partner of Veritas Executive Compensation Consultants LLC.

The highest-paid U.S.-based CEO was Bruce Wasserstein, head of investment firm Lazard Ltd., with headquarters in Bermuda and principal offices in New York, Paris and London. He was awarded a total of $133 million in salary and stock awards in 2008 as part of a new contract, $96 million of which was a special retention award not scheduled to vest for five years.

Lazard shares returned negative 28 percent in the 12 months ended on May 27. Lazard was excluded from the Bloomberg ranking because it’s based offshore.

Lawmaker Questions

No. 1 Blankfein’s $43 million in salary and stock awards came as Goldman Sachs’s stock recorded a loss of 65 percent in total return in fiscal 2008. In 2009, it was up 67 percent as of yesterday, and down 18 percent over 12 months. No. 2 Chenault’s American Express shares returned negative 64 percent in 2008 and then returned 29 percent in 2009 as of yesterday’s market close.

Bonuses for financial company employees were the target at a House subcommittee hearing in March, when lawmakers questioned Edward Liddy, CEO of American International Group Inc., about AIG’s payment of $165 million in bonuses and retention payments to about 400 employees.

AIG has received a bailout package of up to $182.5 billion from the U.S. Treasury to stave off default on tens of billions of dollars of obligations from credit-default swaps, contracts to protect against or speculate on the default of bonds and other securities.

Liddy, former CEO of insurance firm Allstate Corp., is working for $1 a year. He told the AIG board on May 21 that he would step down as soon as the directors find a replacement.

The AIG bonuses earned the company a rebuke from Obama, who in February called them “inappropriate.”

‘Irresponsibility and Arrogance’

That same month, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, lit into Northern Trust Corp., which got $1.6 billion in federal funds, for going ahead with a conference and golf tournament in Los Angeles.

“This behavior demonstrates extraordinary levels of irresponsibility and arrogance,” Frank and 17 other Democratic members of the committee wrote to Northern Trust CEO Frederick Waddell, No. 43 in the ranking, with compensation totaling $3.24 million.

“The populist urge is going to have a great impact on how we run our companies,” says Pearl Meyer, senior managing director of New York-based compensation consultant Steven Hall & Partners LLC, which advises financial companies on pay issues. “I fear the unintended consequence will be the loss of good people we need. How long do you want to be regarded as a scoundrel?”

The New Reality

The Millstein Center’s Davis says one way to defuse the pay issue is for financial CEOs themselves to institute reforms. One that has begun the process is Blankfein. At Goldman Sachs’s annual meeting, he laid out a set of compensation principles to shareholders.

No one in a risk-taking role should be compensated based only on his or her own profit-and-loss numbers, he said, adding that “contracts or evaluations should not be based on the percentage of revenues generated by a specific individual.”

Blankfein himself earned the great bulk of his $43 million in 2008 pay in stock. His salary and other nonstock compensation was $835,943, and he received no bonus. According to the company’s proxy, his $42.1 million in 2008 restricted stock was compensation for Goldman Sachs’s 2007 profit of $11.6 billion, a record for a securities firm. Blankfein, like Pandit of Citigroup, gets the new reality. He will receive no stock options or restricted stock in 2009.

‘Greedy in Hindsight’

“Much of the past year has been deeply humbling for my industry,” Blankfein told a group of institutional investors in Washington in April. “The loss of public confidence from failing to live up to the expectations that we created will take years to rebuild. Worse, decisions on compensation and other actions taken and not taken, particularly at banks that rapidly lost a lot of shareholder value, look self-serving and greedy in hindsight.”

CEOs of the 10 banks that took the most money from TARP got paid $160 million last year, according to Bloomberg data. Together, Blankfein, Pandit and Jamie Dimon of JPMorgan Chase got $117 million of that.

The great bulk of Pandit’s $38 million in 2008 pay was a $35 million, stock-and-options signing bonus awarded to him when he took the CEO job in December 2007.

Dimon’s a Bargain

Dimon earned an average of $32 million a year in 2007 and 2008, yet still provided relatively good value for the money, according to Bloomberg data, which ranked him No. 3 out of 36 CEOs in that category. That’s because JPMorgan stock did comparatively well -- its return for the two years was -30 percent compared with a fall of 66 percent for the Standard & Poor’s 500 Financials Index -- and because the assets of the firm are so huge. They were $2.2 trillion as of the end of its 2008 fiscal year.

Measuring pay per million dollars of assets and taking stock performance into consideration, Dimon provided greater value than Robert Wilmers, CEO and chairman of M&T Bank Corp., who made an average of $850,000 in 2007 and 2008.

American Express’s Chenault topped the Least-Value list after the company’s stock fell 69 percent in 2007 and 2008 even as his annual compensation for both years topped $40 million.

“Ken did not receive a bonus for 2008, and he did not receive a restricted stock award,” American Express spokeswoman Joanna Lambert said in an e-mail. “He did receive an option award with a value of about 10 percent below the prior year. He took a 10 percent salary cut. He did receive a long-term award that will pay out only if the company meets performance targets over the next two years.”

Least-Value List

American Express announced on May 18 that it would eliminate 4,000 jobs, in addition to the 7,000 it cut in October.

Dowd Ritter, CEO of Birmingham, Alabama-based Regions Financial Corp., was No. 2 on the Least-Value list. His 2007 and 2008 pay averaged $10.6 million while the total return of his company’s stock was -76 percent. A spokesman says that Ritter’s pay numbers are distorted by a $12.3 million restricted stock award in 2007 linked to the 2006 merger of Regions Financial with AmSouth Bancorp, of which he used to be CEO.

Ritter’s 2008 pay was $3.8 million.

Pandit and 13 other CEOs at the top 50 firms were excluded from the Best Value/Least Value ranking because they hadn’t held their positions for two years. Stephen Lilienthal, former CEO of Chicago-based CNA Financial Corp., was excluded because $13 million of his $14.3 million in 2008 pay was severance.

Lowest-Paid CEO

Some CEOs live or die by their stock price. Richard Fairbank of McLean, Virginia-based banking and credit card company Capital One Financial Corp. has taken no salary or bonus since 1997. And after being awarded $17.1 million in stock in 2007, he chose to take none in 2008.

That made him the lowest-paid CEO in the ranking, with his $68,000 in compensation consisting solely of allowances for health care, transportation, home security and insurance. In 2001, Fairbank was the highest-paid financial company CEO, earning $69 million, all of it in stock awards, according to Bloomberg data.

Even as financial executives back away from their immense pay packages, the assault from the government continues. The Obama administration has begun discussions with federal regulators about how to create new compensation limits for executives of financial institutions -- whether or not they’ve received money from TARP.

‘Wrenching Shift’

Those looking for a government-orchestrated ratcheting down of bank CEOs’ pay are likely to be disappointed, Harvard’s Hayes says. “Our economic system isn’t amenable to a sudden, wrenching shift from entrepreneurship to centralized government control,” he says. “The philosophical roots of this country are simply against that.”

When the crisis abates, the Millstein Center’s Davis says, responsibility for setting reasonable pay limits will once again fall on boards of directors. “The future of pay rests with whether shareholders have been burned enough to keep their eyes trained on board performance,” Davis says. “Boards have to do a better job of tying pay tightly to performance.”

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.

Last Updated: May 28, 2009 00:02 EDT