Executive compensation is once again under fire. But this time it’s from employees and shareholders, not just regulators.
Last week, Citigroup shareholders – including potentially thousands of employees - rejected a board-approved compensation package for chief executive Vikram S. Pandit which boosted his pay to $14.9 million from $1 the previous year. Some 55 percent of votes went against the package.
Citigroup instantly became the biggest bank to have suffered a no vote on executive compensation. Its shareholders are also suing the bank’s directors for their 2011 compensation on the basis that it was not justified.
What’s particularly interesting is that in the past employee-shareholders have rarely exercised their right to vote. But as news emerged of the latest round of multimillion dollar executive pay packages last month, shareholders in general are starting to put their foot down.
Pandit understands that his employees are a force to be reckoned with. According to an article in the New York Times, on April 13 he sent a memo to his employees urging them to vote. Unsurprisingly, he recommended that they vote “yes” on Citigroup’s pay packages.
News of the rebellion by Citi’s shareholders comes days after a leading shareholders advisory group in the UK argued that Barclays chief executive Bob Diamond should not be paid “any bonus at all.”
Their recommendation followed revelations that Diamond was paid $18.8 million – nine times his base salary, despite the fact that Barclay’s shares were trading “far below net asset value.”
“We cannot think of any circumstances in which a chief executive who was part of a team when the bank got into that predicament should be receiving any bonus at all, indeed the board should also be considering claw backs itself,” the shareholders advisory group Pensions and Investors Research Consultants (Pirc), said.
Barclays has often argued that its pay schemes should not be criticized since it was not rescued with taxpayer funds. But Pirc said: “Although the bank has not failed in the classic sense, trading below net asset value is an investment failure from the perspective of the shareholders.”
In the U.S. too it is hardly shocking that shareholders have started raising their eyebrows and casting ballots against executive compensation.
In 2011, Morgan Stanley’s chief executive, James P. Gorman, took home a $10.5 million pay package in a year in which his firm’s stock price dropped about 44 percent. (In what was seemingly an attempt to pacify its shareholders, the bank noted that Gorman’s compensation for 2011 was 25 percent lower than the previous year).
JP Morgan chief Jamie Dimon took home $23.1 million in compensation – an 11 percent increase from the previous year. His compensation included $143,277, primarily for personal use of aircraft and cars. That was down from $579,624 in 2010 when he was also reimbursed for $421,458 in moving expenses. (In his annual letter to shareholders Dimon noted that the company earned a record $19bn in 2011, up 9% from $17.4bn in 2010, while return on equity remained flat at 15%.)
Goldman Sachs CEO Lloyd Blankfein received was paid $16.1 million in 2011, a 14 percent increase from the year before. This reportedly included $51,467 for a car and driver and $258,701 for security services. (The amount Goldman paid for his security more than doubled from the year before.)
Blankfein's pay rose even though Goldman reported a 47 percent drop in earnings to $4.4 billion in 2011.
Meanwhile, 2011 was also a good year for Bank of America CEO Brian Moynihan, who received $8.1 million - more than four times as much as he received in 2010 - and despite the bank's noted troubles.
[For more on Bank chiefs' 2011 compensation, see related story, "It's a Beautiful (Pay) Day on Wall Street.]
Overall, the 2008 recession failed to shrink executive compensation, despite an initial outcry from investors. In fact. only 38 of the largest 3,000 companies had their executive pay plans voted down, and even then, the votes were nonbinding, the New York Times reported last year.
But now it seems that social media is playing a part in rousing shareholders and employees.
Social media is making it easier for workers to gain a role in their companies’ governance processes, Stephen M. Davis, executive director at the Millstein Center for Corporate Governance and Performance at the Yale School of Management, told the New York Times.
He noted, for example, that employee stock ownership plans encouraged worker participation, but that management kept the voting of those shares under pretty tight control.
“That tends to neuter the voting power of employees if they want to vote critically,” he said. “The work-around is social media, and we see more and more cases of employee shareholders and shareholders in general discovering ways to stimulate knowledge of governance issues at companies and encourage critical voting.”
After years of quiet acceptance of multi-million dollar pay packages, Citi’s no-vote is certainly a sign that employees and shareholders at large should exert their say in how much their bosses get paid.