By Matt Orsagh, CFA, CIPM
We always knew "say on pay" had the potential for big headlines if a large U.S. issuer failed to receive 50 percent support for its executive pay packages.
It happened yesterday.
The target of shareowner ire was Citigroup (C), where 55 percent of the Wall Street bank's shareowners voted against the company's executive pay packages. This included CEO Vikram Pandit's $15 million in compensation ($1.7 million salary, $5.3 million cash bonus, $4 million in deferred stock, and another nearly $4 million in deferred stock). Pandit had previously received praise for agreeing to a symbolic $1 salary in 2010.
Both ISS and Glass Lewis, the two largest proxy advisory firms in the United States, recommended a vote against Citigroup's pay plan. Richard Parsons, who recently stepped down as chairman of the Citigroup board, called the outcome "a serious matter" and said directors would meet with shareowners to discuss the matter further.
Investors who voted against Citigroup on pay cited an ongoing disconnect between pay and performance, noting that the bank's performance in previous years did not warrant the company's practice of offering some of the most generous pay packages in the banking industry. Shareowners also showed concerns over retention awards for executives - a practice frowned upon by many investor activists - including a $10 million retention bonus for Pandit (last year his retention bonus was $16.7million).
In July 2007, Pandit sold his hedge fund, Old Lane Partners, to Citigroup for $800 million and earned a profit of $165 million for his stake. He became CEO of Citigroup just a few months later in a tumultuous time for the company, which saw huge losses during the global financial crisis. Less than a year after purchasing Old Lane Partners, Citigroup decided to shut down the fund due to poor performance. To be fair to Pandit, both the 2010 and 2011 retention bonuses include deferred stock that vest over time and clawback features that can recoup the funds if Pandit knowingly provides inaccurate information relating to financial statements or violates any of the bank's risk limits. Such safeguards may be cold comfort to shareowners who would argue that Citigroup paid Pandit an "upfront" retention bonus of $165 million in 2007.
We don't know what talks Citigroup has had with investors in the past year over pay issues, but it appears whatever talks it held weren't enough. One of the most interesting aspects of the Citigroup vote is that it runs counter to the anecdotal evidence that "say on pay" and majority voting for boards of directors have made companies, especially large, high-profile companies like Citigroup, more willing to listen shareowner concerns. At least that's what we've heard from large institutional shareowners. The rationale is simple: companies want to address shareowner concerns well ahead of a vote at the annual meeting to avoid embarrassing "no" votes.
Emboldened by this newfound leverage, investors are getting more active. Take, for instance, the state of Florida's public pension fund, which sent a letter to the 41 companies that failed to gain 50 percent support on pay in 2011. According to Michael McCauley, head of governance for the fund, about a quarter to a third have implemented "very significant reforms."
Citigroup's compensation committee should expect a letter asking for a meeting - likely many letters - later this year. We suggest they take the meetings.