Almost but not quite

Citi pay plan raises the bar, just not enough

Citigroup’s new executive pay plan raises the bar, just not quite far enough. The bank’s board has implemented a compensation scheme with more rigorous targets for Chief Executive Michael Corbat and his lieutenants. One important performance metric, however, keeps expectations too low.

It took a shareholder revolt to force Citi to act in the first place. Egregiously easy ambitions set for then-boss Vikram Pandit led to 55 per cent of the mega-bank’s shareholders voting against the plan at last year’s annual meeting. It left Chairman Dick Parsons retiring on a low note.

Pandit was to receive $10 million simply for ensuring risk management was sound, promoting a culture of responsible finance and developing a good team. He was due at least $6 million more if pre-tax earnings at Citicorp, the bank’s core operations, totalled $12 billion between 2011 and 2012 — a 60 per cent drop from 2010. They weren’t exactly the sort of goals that inspire hard work.

Under the new plan, executives must meet hard financial targets for the operations they oversee — including revenue, net income, operating efficiency and return on Basel-III capital — to earn a bonus. Thirty percent of the payout will be delivered in the form of performance share units that can only be cashed in if Citigroup hits certain hurdles on both return on assets and total shareholder returns.

While the broad structure looks good, certain thresholds don’t. The return on assets target of 0.85 per cent is more than double the 0.4 per cent achieved last year. Strip out one-off items like accounting hits and restructuring charges, however, and the return was 0.64 per cent.

The drag from Citi Holdings, which houses the assets the bank is trying to unload, will keep shrinking. Assume $30 billion a year goes through 2015. All else being equal, apply that to the Thomson Reuters consensus forecasts for net income and voilà, the 0.85 percent hurdle is met.

Of course, the return on assets counts for naught if total shareholder returns don’t beat half the board-appointed peer group of eight big banks. It’s just that at this stage Citi and its shareholders ought to expect better.