After Losing Billions, Citigroup May Revamp Executive Pay The bank may be the lat - July 1, 2008 - Nicholas Rummell of Financial Week

Citigroup may be the latest financial firm to try to rethink pay packages to
counteract the focus on short-term profits on Wall Street.

According to a story in the Financial Times on Monday, June 30, Citigroup CEO
Vikram Pandit is trying to reduce the incentives for the bank’s managers to take
short-term, risky bets, primarily by tying bonuses to the financial health of
the entire bank, rather than the profitability of each division and the success
of the individual. The move is expected to tear down walls between Citi’s
investment banking and commercial banking divisions and maximize its “universal
banking” model, the newspaper reported.

Calls to Citigroup were not immediately returned.

Experts say Citi is likely considering this move to head off concerns about
the bank’s various divisions being split off. However, the “united we profit,
divided we shrink” strategy may catch on among competitors, some say.

Independent compensation consultant Bruce Ellig said Wall Street firms will
need to follow Citi’s lead and change how they pay their executives, given the
major write-downs financial firms have taken over the past year. “How can they
sustain huge losses and keep paying out the big bucks?” he said.

Citi’s proposal may be viewed as the measuring stick for other bank pay
package redesigns, especially if it includes ceilings or floors for compensation
based on how a bank’s overall business fares, said Ellig, who last year authored
a guidebook on executive compensation. For example, a bank could tie bonuses to
both the success of an employee’s division and to the bank’s overall financial
health, he said.

Such changes may not be long-standing, though. “No company keeps its bonus
system the same each year,” said Don Delves, a Chicago-based compensation
consultant and president of the Delves Group.

He noted that in the past, companies have toggled back and forth between
silo-type bonus systems in which compensation is based on the division’s
performance and holistic systems in which compensation reflects the company’s
overall performance. “There’s no right answer,” Delves said.

Morgan Stanley was one of the first on Wall Street to try to eliminate
short-term thinking among its executives by revamping pay.

Earlier this year, its compensation committee approved a new
performance-based stock option program in which executives would need to meet
certain thresholds during a three-year performance period to receive option
compensation. That replaced a system in which all awards were restricted
stock.

Morgan Stanley’s change was a “step in the right direction,” but the Citi
proposal does not address the focus on short-term earnings—some have blamed this
for helping cause the current crisis—that has enveloped certain financial
services firms, according to Paul Hodgson, a senior research associate for the
Corporate Library.

Still, Hodgson and others predict banks will try to tie executive
compensation more closely to long-term return on equity, following the hue and
cry from unions, investor advocates and other groups that have targeted what
they consider to be unfair pay packages at Wall Street firms.

If financial firms don’t make the changes themselves, Congress may act for
them. The House Oversight Committee, led by Rep. Henry Waxman, D-California, has
been probing the pay packages of Wall Street executives.

Last March, Waxman conducted a hearing at which he questioned whether the
severance packages given to bank CEOs such as Stanley O’Neal and Charles Prince
were warranted, especially in light of the multibillion-dollar losses and
double-digit percentage decreases in share value at those firms.

Nell Minow, editor of the Corporate Library, testified during that hearing
that “there is an obvious disconnect between the performance of these CEOs and
the compensation they received,” noting the risky strategic decisions at those
banks that led to major investor losses.

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce
Management. To comment, e-mail editors@workforce.com.