Citigroup has become the first Wall Street bank to get a thumbs-down from shareholders over outsized executive pay.
At its annual meeting Tuesday, 55 percent of the bank's shareholders voted against the pay packages that have been granted to Citigroup's top executives, including CEO Vikram Pandit's $15 million for last year and $10 million retention pay. The vote is advisory and won't force the bank to change its pay practices, but it did send a powerful message of discontent to Citi's leadership.
"This vote is historic," said Eleanor Bloxham, CEO of The Value Alliance, a board advisory firm. "None of the Wall Street firms have received this kind of a review yet."
Wall Street's massive compensation packages have raised the ire of shareholders for years, especially when they appear to have little relation to the performance of specific executives. Bonuses became a flashpoint of public outrage after the 2008 financial meltdown, which was caused in large part by those same Wall Street firms.
Nonetheless, compensation on Wall Street has remained high, even after a taxpayer-funded bailout of the industry and the Great Recession that followed and left one in 10 Americans unemployed.
Until Tuesday, shareholders haven't voted in large enough numbers against Wall Street pay packages to make a difference. Under the Dodd-Frank financial overhaul law, major U.S. companies are required to allow shareholders to have a "say on pay" vote at least every three years. The votes are not binding.
Besides Citi so far this year, only three companies _ KB Home, International Game Technology Inc. and Actuant Corp. _ have failed to muster shareholders' approval of its pay practices. Last year, 41 companies failed.
For Citigroup's CEO Vikram Pandit, the lost vote at the annual meeting comes at a bad time. Last month the bank's chief regulator the Federal Reserve dealt Citi a huge setback by barring the company from paying a higher dividend, saying the bank wasn't financially strong enough. The Fed's decision came soon after Pandit had been promising to raise dividends.
Pandit's large pay package for 2011 and a large retention pay is not going over well with shareholders. He received $14.8 million in total compensation for 2011, up from his token $1 compensation in 2010.
Pandit was also awarded $10 million in retention pay, which vests after 2013. Paid as an incentive for Pandit to stay on as CEO, Citi's compensation committee will assess him not on financial performance, but on non-quantifiable measures such as talent management, organizational culture and risk management.
"Citigroup is one of most egregious example of disconnect between incentives of top management and value creation of shareholders," said Mike Mayo, bank analyst at brokerage firm CLSA and author of the book "Exile on Wall Street."
"The owners of the big banks, namely the shareholders, are finally taking a greater amount of responsibility by speaking up."
The influential corporate governance firm ISS was particularly concerned about the fact that Pandit's retention pay was not linked to any financial metrics. ISS had recommended that investors vote against Citi's compensation package.
ISS also said in a report that Pandit's pay was higher relative to the performance of its peer group and its total shareholder returns. Since Pandit became CEO in December 2007 through the end of 2011, Citigroup stock was down 90 percent.
Citigroup nearly collapsed during the financial crisis and was rescued by $45 billion in bailout money from the government in late 2008. In February 2009, Pandit said he would accept a salary of $1 until the bank was able to turn a profit. The bank has reported profits for two consecutive years now. However, shareholders didn't seem to agree that it was time to handsomely reward management yet.
"It's a loud clarion call and an embarrassment to the directors, who now have to clarify compensation metrics they use," said Jeffrey Sonnenfeld, senior associate dean for executive programs at Yale University's School of Management.
Mayo said finding a way to address the pay issue will be a test for incoming chairman Michael O'Neill. Richard Parsons, who was chairman since 2009, stepped down from the board this year.
"The buck stops with him," said Mayo.
In a statement late Tuesday, Citigroup said its board and senior management will consult with "representative shareholders" to hear their concerns.
The board's compensation committee "will carefully consider their input as we move forward," the Citi statement said.