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Monday, 01 September 2014

Almost but not quite

Citi pay plan raises the bar, just not enough

Citigroup’s new executive pay plan raises the bar, just not quite far enough. The bank’s board has implemented a compensation scheme with more rigorous targets for Chief Executive Michael Corbat and his lieutenants. One important performance metric, however, keeps expectations too low.

It took a shareholder revolt to force Citi to act in the first place. Egregiously easy ambitions set for then-boss Vikram Pandit led to 55 percent of the mega-bank’s shareholders voting against the plan at last year’s annual meeting. It left Chairman Dick Parsons retiring on a low note.

Pandit was to receive $10 million simply for ensuring risk management was sound, promoting a culture of responsible finance and developing a good team. He was due at least $6 million more if pre-tax earnings at Citicorp, the bank’s core operations, totaled $12 billion between 2011 and 2012 - a 60 percent drop from 2010. They weren’t exactly the sort of goals that inspire hard work.

Under the new plan, executives must meet hard financial targets for the operations they oversee - including revenue, net income, operating efficiency and return on Basel III capital - to earn a bonus. Thirty percent of the payout will be delivered in the form of performance share units that can only be cashed in if Citigroup hits certain hurdles on both return on assets and total shareholder returns.

While the broad structure looks good, certain thresholds don’t. The return on assets target of 0.85 percent is more than double the 0.4 percent achieved last year. Strip out one-off items like accounting hits and restructuring charges, however, and the return was 0.64 percent.

The drag from Citi Holdings, which houses the assets the bank is trying to unload, will keep shrinking. Assume $30 billion a year goes through 2015. All else being equal, apply that to the Thomson Reuters consensus forecasts for net income and voilà, the 0.85 percent hurdle is met.

Of course, the return on assets counts for naught if total shareholder returns don’t beat half the board-appointed peer group of eight big banks. It’s just that at this stage Citi and its shareholders ought to expect better.

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Context News

Citigroup unveiled on Feb. 21 that its board of directors has adopted a new structure for determining executive pay. Compensation “will be determined based on pre-defined performance goals established at the beginning of the year,” according to an official filing with the Securities and Exchange Commission. This replaces the previous structure “which, as is common practice in the financial services industry, involved a high degree of discretion.”

Executive compensation will be based on revenue, profitability, return on assets, operating efficiency, Basel III capital accumulation and return on Basel III capital.

Beyond that, 30 percent of bonuses determined by those metrics will be paid in the form of performance share units. These will be earned according to the bank’s return on assets and total shareholder return over the three-year period between 2013 and 2015.

To receive the full award of performance share units, executives will have to ensure Citi earns a return on assets of 0.85 percent and posts total shareholder returns in the top half of its peer group. Asset returns above 1 percent and belonging to the top quarter of peers on total shareholder return will result in executives earning 150 percent of the units.

The peer group for assessing total shareholder returns is Bank of America, Barclays, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley and Wells Fargo.

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