Citigroup Says Pay Plan Investors Shunned Helped Keep CorbatDonal Griffin
Citigroup Inc. said a profit-sharing plan, among pay practices shareholders rejected last year, helped return the bank to profitability by retaining leaders including Chief Executive Officer Michael Corbat.
The plan was essential for the survival of the New York-based lender as “important executives” were leaving for competitors, the bank said in an annual proxy filing. The firm designed the awards in 2009 after it received a $45 billion U.S. bailout to prevent its collapse amid the financial crisis.
“The Key Employee Profit Sharing Plan helped retain Citi’s key leaders,” the bank said in the filing. “The new CEO, his leadership team, and other key executives remained with the firm and enabled Citi to return to sustained profitability.”
Citigroup directors are seeking to explain compensation practices as a non-binding shareholder vote on 2012 executive pay approaches. Investors rejected profit-sharing payouts in a similar vote last year amid concern that they rewarded executives too easily and gave too much cash to former CEO Vikram Pandit. Top managers including Corbat, 52, still stand to collect about $579 million from the plan, which began paying out earlier this year.
“Had the board and CEO pulled back on those payments, or negotiated smaller amounts in light of the say-on-pay vote by shareholders, the payments would seem more credible,” said James Post, a Boston University School of Management professor who has written on governance and business ethics. “They have chosen not to do so, however, and they are asking shareholders to swallow these very large payments.”
Citigroup Chairman Michael O’Neill, 66, led talks with shareholders following the rejection, according to the filing. The bank said last month that future payouts will be more in line with performance.
Former Chairman Richard Parsons oversaw the creation of the Key Employee Profit Sharing Plan, or KEPSP, as the bank incurred billions of dollars of losses tied to mortgage investments. The firm took more bailout assistance from U.S. taxpayers than any other lender.
Corbat stands to receive $6.9 million under one KEPSP, which covers 2010 through 2012, Bloomberg News first reported on March 5 after analyzing company filings. Citigroup shares gained 20 percent during that period, almost matching the performance of the 24-company KBW Bank Index.
Pandit, 56, was in line to receive about $19 million under another KEPSP, which tracked 2011 and 2012, a period in which Citigroup shares slumped 16 percent, data compiled by Bloomberg show. The size of his KEPSP award was a “key concern” for shareholders, Citigroup said in the proxy. The board ousted Pandit in October, and he forfeited the payout.
The executives would have received more had the lender hit certain profit targets, the bank said. Because it missed those goals, the plan “delivered about 76 percent of the total value that could have been delivered,” according to the filing.
KEPSP was “a critically necessary program to retain key members of the Citi management team in a time of substantial uncertainty, as demonstrated by Citi’s acceptance of extraordinary governmental assistance,” the bank said in the proxy. It was “essential to the survival of the Citi franchise, as important executives were resigning from Citi to work at competitors.”
Mark Costiglio, a Citigroup spokesman, declined to identify the executives whose departures spurred the creation of the plan.
Citigroup repaid its bailout funds in 2010 and reported its first annual profit since the financial crisis. In 2011, the bank announced that Pandit, Chief Operating Officer John Havens, Chief Financial Officer John Gerspach and consumer banking chief Manuel Medina-Mora had joined the KEPSP.
“It was a giveaway,” Post said. “It’s a very flawed concept and it’s one that didn’t really benefit Citi from all that we can tell.”
There will be no future KEPSP awards because they were a “one-time” series of payouts that achieved their “original purpose,” Citigroup said in the March 14 proxy. The lender paid two-thirds of the money by March 15 while executives must wait until 2014 for the rest, filings show.
The awards are tied to performance at Citicorp, the part of the bank that contains businesses such as trading and consumer banking. The KEPSPs excluded pretax operating losses at Citi Holdings, the unit that contains the lender’s unwanted assets such as distressed U.S. mortgages and Greek small-business loans.
The KEPSP “was based on profits of Citicorp and not Citigroup for a specific reason,” the company said in the proxy. “To focus executives on delivering value through the part of the franchise that could be most affected by their business decisions made during the performance period.”
Corbat was CEO of Citi Holdings until the end of 2011. Eugene “Gene” McQuade, who is in line for a $5.5 million KEPSP award, has overseen the division since then. Pretax losses at the unit totaled almost $24.5 billion for the three years through 2012, Citigroup financial supplements show.
Executives were eligible to receive the awards once Citicorp profit exceeded minimum levels inserted into the KEPSPs by the board of directors. Investors told Citigroup these thresholds were too low, making it too easy for managers to pick up millions of dollars in payments.
The thresholds were “not designed to be target performance levels,” Citigroup said in the proxy filing. “Rather, they were viewed as downside protection for Citi.”
Citigroup identified other executives waiting for the 2014 payout. Don Callahan, 56, head of operations and technology, will get $6.9 million under the 2010-2012 KEPSP, the filing shows. Medina-Mora, 62, will get $7.7 million under the 2011-2012 KEPSP and CFO Gerspach, 59, will get $5 million from the same plan.
The KEPSP awards are separate from bonuses and salaries. For 2012, Citigroup gave Corbat $11.5 million and Medina-Mora $11 million, including $4.2 million cash bonuses for each. Gerspach received $7 million while Callahan and McQuade each got $7.5 million.
The executives received so-called performance share units, or PSUs, as part of their annual compensation packages. The PSUs will be paid after three years once Citigroup meets goals tied to total shareholder returns and return on assets, the company said last month.
“Shareholders want rigorous minimum standards for payouts, so we implemented meaningful hurdles for our new plan,” the bank said. “We systematically addressed shareholder concerns.”