Is Citi's Failed Say-On-Pay Vote a Sign of the Times?
As Citigroup celebrates the banks 200th anniversary this year, its probably safe to assume that the banks failed say-on-pay vote for CEO Vikram Pandits $15 million paycheck at its annual meeting this week wont earn a spot in Citis highlight reel, alongside achievements like financing the Panama Canal or inventing the ATM.
But the first shareholder rejection of an executive compensation package at a major Wall Street firm is its own kind of milestone. "This vote is historic," Eleanor Bloxham, CEO of board advisory firm The Value Alliance, told MSNBC. "None of the Wall Street firms have received this kind of a review yet."
From how Citis board and shareholders react, to how the negative vote impacts other banksand even companies in other industriesjust what kind of a litmus test will this vote end up being?
Recall, please, that last year was the first year for so-called say-on-pay votingthe non-binding advisory vote on a companys executive compensation plan, made mandatory by Dodd-Frank legislation. And when the first year of say-on-pay votes were tallied after the 2011 proxy season, the results, by many accounts, were pretty good: only 2 percent of companies out of 2,700 firms in the Russell 3000 failed those votes.
Still, its embarrassing for companies to lose a say-on-pay vote. So most companies that flunked last year have tried to make amends this year, according to Institutional Shareholder Servicesboth by engaging with investors and, in some cases, changing their pay practices. Two notable examples being Jacobs Engineering and Beazer Homes, both of which failed their votes in 2011 and passed with flying colors earlier this year.
But many companies might not have gotten the message about how much pay-for-performance actually matters to investorsespecially given shifting public sentiment on topics like wealth disparity. In an interview with Reuters, Harvard University management professor James Post said: "As we struggle to come out of the recession, CEO packages have continued to increase at a rate that is much greater than the rate of economic performance of these companies."
Thats a point California State Teachers Retirement System, one of the largest pension funds in the country, tried to drive home in an analysis of its own executive comp voting decisions. "First and foremost we look for a pay-for-performance alignment," CalSTRS investment officer Aeisha Mastagni recently told CorpCounsel.
Given Citis performance of late, the no vote shouldnt have come as any surprise, writes Richard Bennett, president and CEO of GMI Ratings. Bennett notes that Pandit received a $5 million bonus in 2011, while Citis share price has declined 20 percent in the past year. Not to mention that:
Investors are rightly concerned about last months report from the Federal Reserve that Citigroup had failed the Feds latest round of stress tests. As a result, in a severe economic downturn, Citi may be forced to raise more capital or postpone their dividend plans. Additionally, a host of investigations and settlements have been hitting the news. For example, two months ago Citigroup was one of five U.S. banks that agreed to pay the government $25 billion to end an investigation into abusive foreclosure practices.
Indeed, ISS issued a report recommending a no vote because of the pay-for-performance issue. Glass Lewis also recommended a no vote.
The real news here is newfound activism among institutional investorsespecially the managers of pension funds and mutual funds, says University of California Berkeley public policy professor Robert Reich, blogging for The Christian Science Monitor. Reich opines the most fund managers were too passive for too long when it came to executive compensation. But now:
Institutional investors are catching on to a truth they should have understood years ago: When executive pay goes through the roof, theres less money left for everyone else who owns shares of the company.
So what is Citis board to do now? As Steven Davidoff writes on The New York Times Dealbook blog, the board really only has two optionseither ignore the advisory vote, or it can try to revise the comp plan somehow. Neither option is attractive or simple, Davidoff writes.
Whichever path the board chooses, Citi could already find itself at risk of regulatory scrutiny, given Dodd-Franks prohibitions on any pay practice that encourages inappropriate risks, Davidoff says. The company could also be subject to shareholder litigation.
Ultimately, writes Davidoff: "The Citigroup case could thus become an important test of how companies respond to negative say on pay votes. Im particularly intrigued to find out what happens if Citigroup fails to adequately respond to all of the players who are now about to become involved."