Question: Citigroup Shareholders Say No on Pay In 2012, Citigroup's shareholders shocked the bank's managers by voting "no" on a proposed $15 million pay package for CEO Vikrim Pandit. In a so-called say-on-pay referendum, mandated by the new Dodd-Frank Act, a solid majority-55 percent-of shareholders withheld approval of the compensation package. Although the vote was not binding, it clearly signaled to Citigroup's board and CEO that shareholders were unhappy. "Here we have the majority of shareholders indicating frustration with the overall level of compensation for executives," said a representative of the labor federation AFL-CIO. "If it can happen at Citigroup, it can happen anywhere." The target of this rebuke, Citigroup Inc., often called simply Citi, was a leading global bank. Citi had been formed from a series of financial megamergers, culminating with one with Travelers Group in 1998. At its core was a bank that served retail customers at 4,600 branches in the United States and around the world. Citigroup also served businesses and other institutional clients, providing investment banking, brokerage, and lending services. A separate unit called Citi Holdings, established after the financial crisis, included various unwanted assets that Citi was trying to divest. The bank was known worldwide by its logo: the word "citi" in blue lower-case type against a white background, with a red eyebrow connecting the two i's. During the financial crisis, Citi had had a near-death experience. Like many other banks at the time, Citi had purchased mortgages and other consumer loans and repackaged them into securities called collateralized debt obligations, or CDOs. It both sold these to investors and traded them for its own accounts-eventually acquiring over $40 billion worth of the risky instruments. Initially, the strategy was highly successful. But the game began to unravel in 2007, as the value of the CDOs on Citi's books began to fall, and the firm was forced to announce billions of dollars of write-downs on bad assets. As the crisis deepened in late 2008 and 2009, the U.S. government provided Citi with a series of multimilliondollar cash infusions in an effort to stave off total collapse of the bank. Since then, Citi had struggled to recover, gradually divesting itself of its risky assets and paying back its government loans. Under Section 951 of the Dodd-Frank Act-passed by lawmakers in response to the financial crisis-public companies were required to give shareholders an opportunity to cast advisory votes at least once every three years on the compensation of top executives. (Companies with a market capitalization below $75 million were exempt until 2013.) The Council of Institutional Investors strongly supported this provision, saying that say-on-pay votes provided boards with useful shareholder feedback and could serve as a "starting point for dialog on excessive or poorly structured executive pay." In 2011, the first year Section 951 was in effect, shareholders approved most compensation packages; say-on-pay resolutions won, on average, 92 percent support, and were rejected outright in only about 2 percent of elections. The executive pay package shareholders were asked to vote on at Citi was complex. For 2011, Pandit was awarded a base salary of $1.7 million and a cash bonus of $5.3 million. At the time of the vote, Pandit had already received these payments. The remainder of the $15 million package was to be paid over the following four years, partly in stock and partly in cash. Neither his deferred compensation nor his job was guaranteed. In its proxy statement, the board defended its proposal by noting that Pandit, who had taken over as CEO in late 2007, had "led Citi's return to profitability and . . . positioned the company for future growth." It pointed out that the bank's net income in 2011 was $11 billion, an increase of 4 percent over the prior year, and that the bank had enjoyed eight consecutive quarters of profitability. Citi had repaid its government loans. Moreover, the board noted, much of the compensation was deferred and subject to meeting performance targets. Although they did not mention it in the proxy statement, directors were certainly well aware that Pandit had drawn a salary of just $1 a year in 2009 and 2010, reflecting Citi's precarious state. But many shareholders-including several large institutional investors-disputed the board's logic. Two proxy advisory firms, Institutional Shareholders Services (ISS) and Glass, Lewis and Co., recommended that their clients vote "no" on Citi's pay proposals, citing the misalignment of pay with shareholder returns. Several big public pension funds and institutional asset management firms agreed and cast their votes accordingly. Their main complaint, said a representative of CalPERS, the California public pension fund, was that "the bank has not anchored rewards to performance." The bank's shares had declined more than 90 percent since 2006, and Citi had recently failed a "stress test" by the Federal Reserve to see if the bank had sufficient reserves to withstand a severe downturn. An analysis by Forbes ranked Citi's performance in the bottom three of 17 U.S. banks. After the vote, the bank's chairman called the shareholder rejection "a serious matter" and said the board would listen to the shareholders' concerns. The directors' options were limited, however. They could either ignore the vote or change the CEO's compensation package. The latter course was complicated, however, because about $7 million had already been paid out, and most observers thought Pandit was unlikely to give back his earnings voluntarily. The board also faced a risk of litigation. At several other firms, no-on-pay votes had been followed by shareholder lawsuits charging that the board had wasted their money on excessive compensation. Because the Dodd-Frank Act was so new, legal precedents were few, and the outcome of such lawsuits difficult to predict. "It's time to roll up your sleeves, go back to the drawing board and come back to shareholders with long-term performance targets, risk-adjusted, that really make sense," declared a representative of CalPERS.

Discussion Questions

1. Do you agree with the provision of the Dodd-Frank Act that mandates advisory shareholder votes on executive compensation? Why or why not?

2. What are the arguments for and against the proposed executive compensation package at Citigroup? Do you agree or disagree with the proposed package, and why or why not?

3. What were the interests of institutional shareholders in this matter, and why did so many of them vote against the proposed package? If you were an individual shareholder, how would you have voted?

4. What do you think the board of directors should do now that a majority of shareholders have rejected the proposed pay package?