Citi's Pay Rejection a Wake-Up Call to U.S. Boards

Institutional investors are increasingly pressing boards to rein in outsized executive pay, and after Citigroup shareholders rejected a compensation plan on Tuesday, more directors may start listening.

Institutional investors are increasingly pressing boards to rein in outsized executive pay, and after Citigroup shareholders rejected a compensation plan on Tuesday, more directors may start listening.

Shareholders on Tuesday handed Citigroup an embarrassing no confidence vote on a $15 million pay package for its Chief Executive Vikram Pandit. About 55 percent of shareholders rejected a plan to bring Pandit's pay back close to levels before the global financial crisis.

The no vote signals dissatisfaction with lucrative pay at companies that have not lived up to industry standards, governance experts said.

"As we struggle to come out of the recession, CEO packages have continued to increase at a rate that is much greater than the rate of economic performance of these companies," said James Post, a management professor at Harvard University.

That has become a flashpoint in a country that was already outraged over pay inequality, and many boards are paying attention, investors said.

"The culture of this country has shifted on this issue," said Eric Veiel, portfolio manager for T. Rowe Price's financial services fund.

Boards are following the public's lead and trends like last fall's "Occupy Wall Street" movement against wealth disparity, he said.

TOUGHER TEST IN 2012

Citigroup's shares are up 33 percent this year, but the bank still faces challenges, including failing to win approval from regulators for a dividend increase or stock buyback. On Monday it posted a 2 percent drop in net income for the first quarter as it struggled to boost profits in a sluggish economy.

The vote on Pandit's pay is nonbinding, but governance experts said it would be difficult for the board to ignore it.

"Everywhere on the political and social side we see a country that is terribly divided over compensation and economic inequality," said Post of Harvard University. "CEOs are the poster children for this."

Shareholders won the right to vote on executive pay at most public companies with the 2010 Dodd-Frank act, though many observers were skeptical that the advisory votes would make much difference.

Average CEO pay fell during the recession, but surged in 2010 as a recovering stock market triggered more bonus awards. Preliminary data from Meridian Compensation Partners suggests pay rose more modestly in 2011.

While few companies had their pay plans rejected last year, they could face a tougher test in 2012, partly because institutional investors have had more time to fully prepare for the votes.

"It's not a matter of share owners sitting on their hands," said Anne Simpson, director of corporate governance for the California Public Employees' Retirement System, or Calpers. "Last year all of the big share owners like Calpers were working out their framework for analyzing these proposals."

Last year, only 41 companies failed to get majority support for their pay out of an estimated 2700 companies in the Russell 3000 index that held votes.