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Nice Work If You Can Get It

Citigroup’s Chief Executive Officer, Vikram Pandit, was apparently pushed out by that company’s board of directors after five years in that position. And Bloomberg reports that during that time, Pandit earned $261 million while the company, the third largest American bank, lost 90% of its stock value.

Citigroup shares rose 1.6 percent to close yesterday at $37.25 in New York. While the stock gained 39 percent this year through Oct. 15, it was down about 90 percent since Pandit was publicly named as CEO in December 2007, when losses tied to the brewing financial crisis drove out his predecessor, Charles O. “Chuck” Prince…

If no alterations are made to Pandit’s compensation, Citigroup will have paid him about $261 million in the five years since he became CEO, including his personal compensation and about $165 million for buying his Old Lane Partners LP hedge fund in 2007 in a deal that led to his becoming CEO. The bank shut Old Lane soon after Pandit took the post, causing a $202 million writedown.

The way we pay corporate executives in this country is appallingly stupid and gets all the incentives wrong. A CEO’s earnings should be contingent on the performance of the company, and not just the stock performance (stocks are booming now, but that doesn’t mean we have healthy companies or a healthy economy). There should be metrics beyond the price of stock, and if those metrics are met, the CEO should be paid for that performance. The same goes for other types of executives at the company.

Comments

  1. D. C. Sessions says

    A CEO’s earnings should be contingent on the performance of the company, and not just the stock performance (stocks are booming now, but that doesn’t mean we have healthy companies or a healthy economy).

    I’d settle for stock options that don’t vest until several years after the executive leaves the company. And, yes, that’s an incentive to keep tenure short. Deal; it is also an incentive to build for the long run instead of (as the Right calls it) a “sugar high” that they can cash in and abandon.

    As for Carly Fiorina-style “golden handshakes” where the company has to fork over Imperial sums to get rid of disastrous mismanagers …

  2. Didaktylos says

    Better still – executives should have the usufruct of a dedicated block of their corporation’s stock.

  3. Mr Ed says

    To over simplify communism doesn’t work because people work for their own benefit not the collectives. Similarly, large corporations don’t work because executives work for their own benefit and not the company. Compensation and advancement are tied to very short term goals. I worked for a large corporation where the president sold some commercial property and in an emperor has no clothes moment every one lauded him with praise for his business acumen for make that quarters targets.

    As said above we need to tie compensation to long term health of the company and not short trem metrics

  4. kantalope says

    I have a standing offer to any of the big corporations: I could lose you that kind of money anytime, and I’ll work for half what you are paying that guy. And when the SEC comes calling and I say I have no idea what is going on, I won’t be lying.

  5. says

    There should be metrics beyond the price of stock, and if those metrics are met, the CEO should be paid for that performance. The same goes for other types of executives at the company.

    And for politicians. Their pay should be based on the median income (say, two or three times the median income), minus the percent unemployment, percent drop-out rate from the schools, percent with no health insurance, and so on. For federal representatives, that would be national rates; for state representatives, that would be state rates; and so on.

    I suspect you could come up with a formula that is both fair, and provides an incentive to fucking fix things, and make sure they aren’t broken again.

  6. pramod says

    nigelTheBold, if you pay your politicians less, they just become more corrupt and earn more under the table.

  7. Azkyroth, Former Growing Toaster Oven says

    And Bloomberg reports that during that time, Pandit was paid $261 million while the company, the third largest American bank, lost 90% of its stock value.

    FIFY.

    nigelTheBold, if you pay your politicians less, they just become more corrupt and earn more under the table.

    And if you pay them, more they think they’re entitled to it and continue to be more corrupt and get more under the table.

  8. says

    What gets lost is the fact that CEO compensation has spiraled out of control. I started looking into this after a conversation I had with my dad about the fifties and the pay he got. During the 50’s, 60’s and part of the 70’s, CEO pay ranged anywhere from 70 to 90 times the median individual income. Which is still a lot, but, at least barely, justifiable. Then it started taking off. Taking Pandit’s total compensation of $261M results in a figure of 1,240 times the median income, and taking his “personal compensation” of $96M still results in a 450 times larger income. If this is average for these guys, then I’m starting to think we need a little bit more “class warfare” rather than less.

  9. iangould says

    In Pandit’s case, he prevented the company from goign bankrupt which would have resulted in shareholders losing that last 10% of their investment.

    There’s a lot wrong with corporate renumeration in the US but Pandit is far from the worst example.

  10. iangould says

    Oh and the $202 million for Old Lane should only count as part of Pandit’s compensation if he was sole owner and personally liable for te company’s debts.

    I know it doesn’t fit with the popular narrative of how the WEall Street Fat Cats crashed the economy but during 2007 to around 2009, the major banks were essentially forced to take over loss-making smaller banks as a condition of getting Federal assistance. The Old Lane deal, or soemthign similar with another bank, would probably have happened regardless.

    Then too, the 90% loss to Citigroup’s shareholders also doesn’t fit with that narrative. I thought the banks were supposed to have gotten off scot free while receiving hundreds of billions of dollars in bail-out money.

    In reality, of course, bank shareholders took massive losses and the bank bail-outs made a profit for the government.

  11. says

    A CEO’s earnings should be contingent on the performance of the company…

    But they are! If the company performs well, they get 9 figures of compensation. If the company performs poorly, they only get 8 figures. What could go wrong?

  12. raven says

    In Pandit’s case, he prevented the company from goign bankrupt which would have resulted in shareholders losing that last 10% of their investment.

    He did no such thing.

    Citicorp was bailed out by the Federal Reserve and TARP which tossed huge quantities of money into the company and guaranteed that they wouldn’t fail.

    My cat could have done as much. Hell, my stuffed toy dog could have done has much.

  13. raven says

    washingtonpost:

    During the height of the financial crisis in October and November of 2008, Citigroup got more than $45 billion in federal aid in exchange for preferred shares.

    How hard is it to cash a check for $45 billion?

    Who really got hammered by citigroup was the common stock shareholders. They did a 1 to 10 reverse split not too long ago.

  14. flex says

    rolfboettger wrote, @9,

    What gets lost is the fact that CEO compensation has spiraled out of control. I started looking into this after a conversation I had with my dad about the fifties and the pay he got. During the 50′s, 60′s and part of the 70′s, CEO pay ranged anywhere from 70 to 90 times the median individual income.

    Do you have sources for executive pay in the 1950’s? I’ve been curious for some time how much they aligned with the top marginal tax rate. It is my suspicion that many executives voluntarily limited their pay to avoid the 90% marginal tax bracket.

    I’ve been meaning to hit the stacks and do the research for a few years, but I’ve not yet taken the time. So if you have sources I would appreciate it.

    At this point there is no way to limit executive pay. The stockholders are largely institutional holders who are not interested in company performance, only stock performance. The boards of directors are all sleeping in the same bed, and have no incentive to limit executive pay. The suggestion that the government should get involved has been still-born, and frankly I don’t think it’s appropriate to legislate a cap.

    However, legislation can create incentives to voluntarily limit pay. The primary one would be to bring back the 90% tax bracket reduced in the 70’s by Nixon and halved in the 90’s by Reagan. Taxing capital gains at a higher rate than ordinary income would also reduce enthusiasm for using stock options as part of a compensation package.

  15. dontpanic says

    It is my suspicion that many executives voluntarily limited their pay to avoid the 90% marginal tax bracket.

    I don’t understand this argument. Is it a massive fail on those executives’ part to think that there’s something to be gained by avoiding the 90% marginal bracket if it comes at no extra effort? As long as the tax code is progressive (that is the increased rate only counts against the amount above the lower bound) one comes out ahead no matter how much more one earns. Or are you saying that avoiding that is what triggered the move to using stock, etc as a compensation device? Not so much that they “voluntarily limited their pay” but that they shifted how it was delivered to them via the artifice of “earned” income vs. not.

  16. flex says

    dontpanic wrote,

    Or are you saying that avoiding that is what triggered the move to using stock, etc as a compensation device?

    My apologies that I wasn’t as clear as I could have been.

    It is my suspicion that during the 1950’s and 1960’s executive pay was voluntarily capped to avoid giving the government 90 cents of every dollar they earned. Even in the 1950’s, executive boards viewed government as taking away their hard-earned profits to benefit the undeserving. If you read literature from the period, it’s pretty clear that business executives did not like there being a 90% top marginal rate.

    I would like to get actual numbers of executive compensation to see how well it matches with the literature. Did executive boards voluntarily limit the amount of income they earned to around $400,000 (which is near where the 90% top marginal rate started)? Or did they complain about giving 9/10 of their income to the government but still took more? That’s the question I want to answer.

    Was some compensation shifted to other perks? Certainly, but there are limits to how many planes, yachts and homes a company would be willing to purchase for members of the executive board. Most of these perks were, at the time, non-taxable.

    As for the second part of your question, there are several reasons why stock options are attractive, but not because of a high top marginal bracket. The shift to stock options occurred after the top marginal rate had already declined to the upper 30% range. So there is little connection between the top marginal rate and the shift to stock options as a form of executive compensation.

    Of course, with capital gains taxed at a different, and much lower, rate than other income stock options are more attractive. Since 2001, stock options have been a very, very attractive form of compensation because they are taxed at only 15%, far below the top marginal tax bracket.

  17. dontpanic says

    I ask because I’ve met relatively intelligent people who still labor under the misapprehension about how marginal rates work (i.e. they think that once the threshold is passed all the income is taxed at the new rate). I just wondered how true this was of those to whom you’re referring and whether that influenced their thinking about executive pay.

  18. flex says

    Ah, understood.

    Rest assured, I do understand how marginal rates work. But I can also understand why you would ask the question. I’ve had to explain them to others a number of times. I blame TurboTax. On the back of all the old tax instructions printed by the IRS there was an explanation of how marginal rates worked. With the rise of tax preparation software which is easy to use, this annual reminder of how marginal tax rates work is lost.

    If you would like, scatter the word “additional” in front of “income” in several places above and it would be clearer that I understand the distinction.

    Since I tend to be prolix in my prose, I also tend to edit severely. I attempt to gain clarity through brevity, but I am not always successful.

  19. left0ver1under says

    Many of these “executives” get paid not on the company’s performance, but on how many mergers and other typess of transactions they perform, regardless of positive or negative effect on the company. Pandit’s own company merger with Citibank is one such example.

    CEOs have every incentive to be aggressive and reckless, and no reason to be concerned for the consequences because they’ll get paid regardless of what happens (e.g. WorldCom). It’s a big reason why the banks, investment companies and many others got into such sorry shape and caused the 2008 crash.

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