Citigroup Say-on-Pay Rejection Is a One-Off Event, Sadly

One big say-on-pay rejection at Citigroup and one small one at FirstMerit do not make a trend.

The Dodd-Frank Act, passed in 2010, requires a shareholder advisory vote on compensation packages for public company senior officers. But only 45 companies – less than 2% of the total –received negative votes on those pay packages from a majority of their investors in 2011, according to proxy adviser Institutional Shareholder Services.

The recent majority shareholder rejection of pay packages for CEO Vikram Pandit and senior officers at Citi is an anomaly, in my opinion. There is no uprising.

Most shareholders are not activists. Relatively few voice displeasure over executive pay, or any other banking industry issues such as foreclosures or the reappointment of ineffective audit firms. About the only thing they do wake up for is to complain about poor dividends. Even activist investor Bill Ackman of Pershing Square reportedly voted yes to the Citigroup package.

Citigroup's share price is about 10% lower now than at this time last year. For short-term investors, that performance is not unexpected in this economic environment. But for long-term investors like CalPERS, which voted "no" on the say on pay proposal, and proxy advisors like ISS and Glass Lewis, which recommended a "no" vote, it is Pandit’s overall record that matters most. Citigroup’s share price today is almost 90% lower than it was when Pandit took over as CEO in 2006.

So why, under those less-than-stellar metrics, did the board try to restore CEO Pandit's pay from $1 for 2009 and 2010 to peer group levels? After all, Citigroup, more than any big bank, had the longest road back from near-failure, majority government ownership, and continued net losses after the 2008 crisis. Citigroup's most recent quarterly results were mixed. Income and revenue declined 2% from last year and the Treasury rejected the bank's request to return capital to shareholders. There are miles to go before Pandit can claim victory.

Based on the number of actual votes cast versus shares outstanding, the rejection is not as stinging as it may first appear. Only 33% of total shares outstanding actually voted on the pay packages. That's because only 75% if Citigroup's outstanding shares showed up to be counted and a whopping 21% of those ballots were broker non-votes. (A say on pay advisory vote, required at least every three years under Dodd-Frank, is a non-routine proxy matter, according to New York Stock Exchange rules and, as such, brokers can not vote proxies on behalf of shareholders that do not return them.)

The say on pay vote at Bank of New York Mellon, cited by an American Banker story as a "rupture" because only 58% of shareholders that voted approved the proposal, is also not as wrenching as it appears. At Bank of New York, 87% of the outstanding shareholders showed up and broker non-votes were only 8% of those. So the votes in favor of the pay strategy still equal 53% of those who showed up. At Citigroup that percentage was only 35%.

A lawsuit was filed within days, before the bank even filed the 8-K documenting the vote. But prevailing in a shareholder suit like this one is tough. The plaintiffs will have to prove that a lawsuit is their only recourse. Unless they can prove that the Citigroup compensation committee, for example, lacks independence, their chances of succeeding are slim. And there's no law or listing standard that requires the outside compensation consultants to be independent.

Citi's board will be scrutinized more closely by regulators and courts as a result of this "no" vote, however. It wasn't long ago that a Delaware court refused to dismiss claims that the Citigroup board had engaged in corporate waste when they decided to pay departing CEO Chuck Prince $68 million.

The most important ramification of the "no" vote for Citigroup, though, is that the bank will have to disclose more in next year's proxy about what in the world they were thinking. According to the Dodd-Frank regulations, Citigroup must describe how the board considered the results of the shareholder advisory vote when determining compensation policies and decisions and how that affected their decisions and policies.

This might seem to some like a positive development that will deter other banks from being so profligate with scarce and still volatile earnings – signing them away to executives instead of saving for a rainy day or returning them to shareholders. I doubt it.

Since 2007, Citigroup's stock has underperformed even Bank of America's. But it wasn't until prodded by proxy advisors and activist institutional investors that anyone showed up to vote, let alone took a contrary view.

Most shareholders still blindly vote in favor of pay packages, says Broc Romanek, lawyer and blogger atTheCorporateCounsel.net, "thereby arguably providing directors a shield from liability for the poorly designed pay packages they give a CEO." Despite the much-ballyhooed nominal salary Pandit received in 2009 and 2010, his package for those years also included things like deferred compensation and stock options that set him up for a fat payout once metrics improved and the shares recovered, which happened in 2011. Yet until this year, Citi shareholders overwhelmingly voted in favor of Pandit's package at each annual meeting (82% in 2009, 89% in 2010, and 93% in 2011, according to Romanek). No one was questioning whether the board was making him work hard enough for those deferred goodies.

Even if shareholders vote "no," it's a fairly empty gesture. The company is under no obligation to do a thing about it. By the time shareholders voted on it, Vikram Pandit had already cashed half of his 2011 $15 million paycheck. He is contractually promised the rest over the next four years, barring clawbacks or adjustments based on his performance.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.