Commentary: Pay For Performance: One Step Backward At Citi

Last October, days before the merger of Travelers Group Inc. and Citicorp went through, Travelers CEO Sanford I. Weill spoke at the Council of Institutional Investors' semiannual meeting in New York. Responding to critics of his giant pay package--he made $231 million, including exercised options, in 1997--Weill said that, unlike other executives, he and his top management team couldn't sell stock. They had vowed not to since he ran Commercial Credit in 1986, and in 1997, Travelers formalized the promise in its proxy statement: With few exceptions--to make charity gifts or raise money to exercise options--they would not cash out. "As long as we were with the company we could never sell stock," says Jeffrey B. Lane, Travelers' former vice-chairman.

That pledge, along with Travelers' zooming stock, kept the pay gadflies at bay. But that was before Travelers merged with Citicorp to become Citigroup. In the new proxy, the restrictions have been watered down. Top managers can now sell 25% of their stock, and on Mar. 10 and 12, Weill filed to sell 3 million shares worth an estimated $191 million--20% of his stock holdings--citing normal estate planning. Co-Chairman John S. Reed also filed to sell 875,000 shares.

That's just one example of how Citigroup and its compensation committee seem to be moving away from some progressive executive pay policies that the preceding companies had and toward a less enlightened practice: massive paydays for top execs, with lower performance hurdles. "They've eliminated the best of both packages, and now there's nothing good for shareholders," says Ann Yerger, director of research at the Council of Institutional Investors. Reed, Weill, and members of the committee declined to comment, but a spokesperson says: "Mr. Reed's and Mr. Weill's compensation is tied directly to the creation of shareholder value."

Before the merger that link was clearer. Reed had won praise for a tough option package that didn't vest unless company stock reached ambitious targets. The new proxy lists "Founder's Grants" of options on 1.75 million shares to both CEOs at the October market price--with no extra hurdles. Citigroup's stock is up 36% since then, making the options worth $29.2 million on paper.

There's more. Although fourth-quarter earnings fell 27% and 10,400 jobs are being cut, Reed's bonus for 1998 rose 214%, from $2.5 million to $7.8 million--equalizing his nonoption pay with that of co-CEO Weill. "I would have preferred it if Sandy's level had gone down to John's level," says David S. Berry, director of research at Keefe, Bruyette & Woods Inc.

True, Citi's rules limiting sales of executive stock are still tough relative to those of most companies. But the loosening of standards is a disturbing trend--and a missed chance--to require more, not less, performance for pay at one of America's most important companies.

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