In the early and mid-2000s, Citigroup had compensation practices that can fairly be described as a disaster for shareholders (and for the broader economy). Top executives, such as then-CEO Chuck Prince, received big bonuses and generous stock options. Lower level managers and traders were paid along similar lines. These incentives encouraged Citi employees to take risks and boost profits. Unfortunately for shareholders, the profits proved largely illusory – when the dangers around housing and derivatives materialized fully, the consequences almost destroyed the firm.
The market value of Citigroup’s stock dropped from $277 billion in late 2006 to under $6 billion in early 2009. The shareholders could easily have been wiped out – they were saved from oblivion by a generous series of bailouts provided by the federal government (see Figure 7 in the final report of the Congressional Oversight Panel; direct TARP assistance was $50 billion but “total federal exposure” was close to $500 billion). In the next credit cycle, the experience for Citi shareholders could be even worse. So it is entirely reasonable for shareholders to look carefully at, among other things, the details of how executives and other key employees are paid – and to understand the current incentives for taking and managing risk.
But Citigroup is resisting efforts to disclose fully the structure of relevant compensation contracts. What is Citigroup hiding now?
The specific issue is a request by Richard Trumka, president of the AFL-CIO, for Citigroup to disclose precisely how employee compensation is affected when a person takes a government position. (See David Dayen’s article in the New Republic for more detail and context, including requests for similar information from other large banks. I use Mr. Dayen’s very helpful links to documents below.)
As Mr. Trumka puts it, “Like many institutional shareholders, the AFL-CIO supports the use of compensation plans that align the interests of senior executives with the long-term interests of the company. We oppose compensation plans that provide windfalls for executives that are unrelated to their performance.”
Citigroup’s compensation arrangements remained troubled long past the financial crisis. In 2011 shareholders rejected Citigroup’s executive compensation plan, in part because of concerns about the incentives for then-CEO Vikram Pandit. (Mr. Pandit was subsequently eased out of Citigroup, on generous terms relative to the value he provided to shareholders.)
The current board of directors has stated repeatedly that the problems with these policies are now fixed, precisely because executive compensation is now related to performance – including what happens after decisions are taken (see, for example, the company’s 2014 proxy statement).
But Mr. Trumka is flagging a major issue – and one the board does not want shareholders to review or apparently even understand in detail. When an executive or other manager leaves Citigroup to join the government, what exactly happens to their deferred compensation? What is the precise wording in their contracts and how much money is involved?
Goldman Sachs offers a lump-sum payment to employees who leave to join the government (see section 9 in this filing.) The logic here is that a government official should avoid any appearance of a potential conflict of interest; see Mr. Antonio Weiss’s ethics statement to Treasury in November.
Such an arrangement obviously raises an important issue for shareholders. If deferred compensation is supposed to encourage more careful risk-taking, then acceleration of vesting and immediate payments will tend to do the opposite.
Citigroup argues that its arrangements are different – and that vesting will continue on the original schedule. It’s hard to see how this can be a credible commitment. If a Citi executive becomes, for example, Treasury Secretary or US Trade Representative or First Deputy Managing Director of the IMF (all positions occupied by Citi alums), how can such a person continue to gain in significant material fashion from Citigroup’s performance? Anyone with broad responsibility for economic policy and financial sector oversight should not be in a position to gain or lose large amounts of money from the performance of a single financial firm (let alone one of the world’s biggest banks, with interests spread around the globe.)
Presumably the board of directors can – and would – make an exception for anyone joining the government at a sufficiently senior level. Some statement of policy along these lines would presumably provide helpful guidance to shareholders, who are entitled to agree or disagree with the details.
In any case, Mr. Trumka is only requesting more disclosure of Citigroup’s precise arrangements. And, not satisfied with the lack of response from Citigroup, the AFL-CIO is now asking that shareholders be allowed to vote on making these details known, as part of the process surrounding the 2015 annual meeting of stockholders. The proposed motion reads,
“RESOLVED: Shareholders of Citigroup (the “company”) request that the Board of Directors prepare a report to shareholders regarding the vesting of equity-based awards for senior executives due to a voluntary resignation to enter government service (a “Government Service Golden Parachute”). The report shall identify the names of all Company senior executives who are eligible to receive a Government Service Golden Parachute, and the estimated dollar value amount of each senior executive’s Government Service Golden Parachute.”
“For purposes of this resolution, “equity-based awards” include stock options, restricted stock and other stock awards granted under an equity Incentive plan. “Government service” includes employment with any U.S. federal, state or local government, any supranational or international organization, any self-regulatory organization, or any agency or instrumentality of any such government or organization, or any electoral campaign for public office.”
Citigroup has asked the Securities and Exchange Commission for permission to exclude this proposal from its proxy statement, i.e., for permission not to put the issue before shareholders. (See Mr. Dayen’s article for more details.)
What exactly is Citigroup hiding this time?
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