By Agnes Crane and Antony Currie The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
All is not lost for Vikram Pandit. While a majority of Citigroup shareholders voted against the chief executive’s pay package at this week’s annual meeting, there’s still a way to incentivize him while also benefiting investors. General Electric, which faced similar unrest over pay last year, offers a good starting point.
A number of the Connecticut conglomerate’s owners last year told the company they weren’t happy with the long-term incentive plan it had given chairman and CEO Jeffrey Immelt. In response, GE changed two of the absolute and relative targets the company needed to hit before awarding Immelt his full whack of two million options over GE shares.
Immelt will only get half of the options if GE’s industrial operations generate at least $55 billion of cash flow over a four-year period ending in December 2014. That’s no simple feat: based on last year’s showing, GE would fall $6.6 billion short. To receive the other half, GE’s total shareholder return has to meet, or exceed, the S&P 500’s. Again, that’s no foregone conclusion: GE has underperformed since 2008.
Similar fixes could be made to Pandit’s package. For instance, he’s slated to receive 0.55 percent of whatever Citi’s core business cumulatively earns over 2012 and 2013 as long as it’s at least $12 billion – meaning a minimum of $6.5 million for Pandit. Yet Citicorp raked in just over half the target amount in the first quarter alone and $30 billion over the previous two years. The pay wasn’t the problem – the target was just too low.
Similarly, Citi set touchy-feely targets for Pandit in return for a $10 million award of deferred stock. Ensuring the bank has adequate capital, decent people, good risk management and exercises responsible finance are basic tasks for the boss. Replacing these with a less subjective metric, like hitting a certain return on equity or beating the KBW banks index would better align the interests of the CEO and shareholders.
Indeed, Citi could even one-up GE by inserting a sliding scale that would award Pandit even more riches if he exceeds his goals. Of course, that would require robust oversight and risk management to ensure the boss doesn’t sacrifice long-term sustainability for short-term profitability. But paying Pandit handsomely for doing an excellent job is a luxury problem Citi’s shareholders might be willing to welcome.