Friday, April 20, 2012

Good pay and obscene pay

Citigroup shareholders rebuffed this week Citi’s $15 million pay package for its chief executive, Vikram S. Pandit. This is the first time that shareholders have united in opposition to outsized compensation at a financial giant. That is why this news deserves attention. According to the NYT, about 55 percent of the shareholders voting were against the plan, which laid out compensation for the bank’s five top executives. Disapproval is not common. In 2011, shareholders at only 42/3000 companies voted against pay plans. So, this looks like the beginning of emancipation. David Dreman, whose money management firm owns about $400,000 worth of Citigroup shares, is quoted arguing that “Shareholders have finally done something constructive on the whole C.E.O. pay problem.” And Brian Wenzinger, a Philadelphia money management company that voted against the pay package said: "C.E.O.’s deserve good pay but there’s good pay and there’s obscene pay." A few more quotes from the same piece: Mike Mayo (Credit Agricole Securities): “This is a milestone for corporate America. When shareholders speak up about issues on which they’ve been complacent, it’s definitely a wake-up call. The only question is what took so long?” But you should not be misled... this is not part of the initiative to reduce executive compensation. The same piece makes clear that shareholders voted against the pay proposal because it "lacked rigorous goals to incentivize improvement in shareholder value," according to ISS Proxy Advisory Services. Apparently, "Citigroup has had the worst stock price performance among large banks over the last decade but ranked among the highest in terms of compensation for top executives." Mr. McCauley, a senior officer at the Florida State Board of Administration, which voted against the plan, argues that “the plan put forth reveals a disconnect between pay and performance.” Calpers, the California state pension fund, also voted against because pay was not linked to performance. And even those who were in favor were on the same page: Mr. Ackman, head of Pershing Square Capital Management, argues that the CEO Vikram Pandit "is doing an excellent job and the bank has made tremendous progress during his tenure.” So, even if framed this way, this "rebuke" is not part of the OWS thing. It is, I believe, just another chapter of the old motto, "the corporation and its executives ought to maximize shareholder value."