Citigroup has become the first Wall Street bank to get a thumbs-down from shareholders over outsized executive pay.
At its annual meeting Tuesday, 55 percent of the bank's shareholders voted against the pay packages that have been granted to Citigroup's top executives, including CEO Vikram Pandit's $15 million for last year and $10 million retention pay. The vote is advisory and won't force the bank to change its pay practices, but it did send a powerful message of discontent to Citi's leadership.
"This vote is historic," said Eleanor Bloxham, CEO of The Value Alliance, a board advisory firm. "None of the Wall Street firms have received this kind of a review yet."
Wall Street's massive compensation packages have raised the ire of shareholders for years, especially when they appear to have little relation to the performance of specific executives. Bonuses became a flash point of public outrage after the 2008 financial meltdown, which was caused in large part by those same Wall Street firms.
Nonetheless, compensation on Wall Street has remained high, even after a taxpayer-funded bailout of the industry and the Great Recession that followed and left one in 10 Americans unemployed.
Until Tuesday, shareholders haven't voted in large enough numbers against Wall Street pay packages to make a difference. Under the Dodd-Frank financial overhaul law, major U.S. companies are required to allow shareholders to have a "say-on-pay" vote at least every three years. The votes are not binding.
Besides Citi, only three companies -- KB Home, International Game Technology and Actuant Corp. -- have failed to muster shareholders' approval of its pay practices so far this year. Last year, 41 failed.
For Pandit, the vote at the annual meeting comes at a bad time. Last month the Federal Reserve dealt Citi a huge setback by barring it from paying a higher dividend, saying the bank wasn't financially strong enough. The decision came after Pandit had promised to raise dividends.
Pandit's large pay package for 2011 and retention pay is not going over well with shareholders. He received $14.8 million in total compensation for 2011, up from his token $1 compensation in 2010.
He was also awarded $10 million in retention pay as an incentive for him to stay on as CEO. It vests after 2013.
Citi's compensation committee will assess him not on financial performance, but on non-quantifiable measures such as talent management, organizational culture and risk management.
"Citigroup is one of most egregious example of disconnect between incentives of top management and value creation [for] shareholders," said Mike Mayo, bank analyst at brokerage firm CLSA.
"The owners of the big banks, namely the shareholders, are finally taking a greater amount of responsibility by speaking up," he added.
The influential corporate governance firm ISS was particularly concerned about the fact that Pandit's retention pay was not linked to any financial metrics. ISS had recommended that investors vote against Citi's compensation package.
ISS also said Pandit's pay was higher relative to the performance of its peer group and its total shareholder returns. Since Pandit became CEO in December 2007 through the end of 2011, Citigroup stock was down 90 percent.
Citigroup nearly collapsed during the financial crisis and was rescued by $45 billion in bailout money from the government in late 2008. In February 2009, Pandit said he would accept a salary of $1 until the bank was able to turn a profit. The bank has reported profits for two consecutive years now. But shareholders didn't seem to agree that it was time to handsomely reward management.