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C » Topics » Process for determining executive officer compensation

This excerpt taken from the C DEF 14A filed Mar 20, 2009.
Process for determining executive officer compensation
 
The role of the Personnel and Compensation Committee. The committee is responsible for evaluating the performance of and determining the compensation for the ceo, and, in accordance with guidelines established by the committee from time to time, approves the compensation for the senior leadership committee. The committee regularly reviews the design and structure of Citi’s compensation programs to ensure that management’s interests are aligned with stockholders and that the compensation programs are aligned with Citi’s strategic priorities.
 
In furtherance of these goals, the committee has retained icca to provide independent evaluations and advice regarding executive compensation. icca does no other work for Citi, reports directly to the chair of the committee and meets with the committee in executive session, without the presence of Citi management. icca was asked to review the committee’s process, its decisions regarding current ceo compensation and the compensation of other members of senior management, and the reasons for reaching those decisions. The committee also relies on Mercer Human Resource Consulting to provide data, evaluations and advice regarding executive compensation. The committee instructed the consultants to meet with senior management to review Citi’s process, financial performance, and market data. The consultants were asked to


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evaluate the compensation recommendations for senior management in light of these factors and management’s description of the performance assessment. Towers Perrin also provided market data regarding compensation trends in the financial services industry.
 
Compensation process and approach for 2008. In November 2008, the committee met with senior management to review the approach to year-end compensation decisions. The proposed approach emphasized the following general principles: performance-based incentive pools, performance-based differentiation of individual compensation decisions, a mix of incentive and retention awards, and recovery or “clawback” of compensation where appropriate. The approach also emphasized partner-like behavior across the organization, to encourage behavior benefiting the franchise as a whole.
 
In December, the committee met with management to review preliminary financial data against the compensation philosophy in the determination of company-wide bonus pools and the bonus pools for senior management. In light of the extraordinary financial upheavals that occurred during 2008, market data provided limited meaningful guidance regarding contemporary compensation practices, as compensation data from 2007 and 2008 compensation surveys became an unreliable predictor of actual competitor compensation practices for 2008. The committee also reviewed and approved specific elements of the executive compensation structure, including the size of the executive bonus pools, the percentage of management executive committee compensation payable in deferred cash retention awards and performance-vesting stock and performance priced options, the “clawback” provisions and restrictions on executive severance. Their decisions also reflected the terms of the securities purchase agreement dated December 31, 2008 by and between Citi and the U.S. government (the securities purchase agreement).
 
Performance evaluations and determination of the nominal amount of the awards. In January 2009, the committee determined the size of the bonus pool for the senior leadership committee, and reduced the value of such pool by approximately 43 percent over the pool for
 
similar positions for the prior period. The amount of the reduction exceeded the reduction required by the terms of the securities purchase agreement. The committee then provided for the structure of executive compensation previously described, including an emphasis on deferred cash retention awards over currently payable cash awards and performance-vesting stock and performance priced options in lieu of traditional equity awards that vest solely according to the passage of time. The committee also made cash and equity awards subject to the “clawback,” which provides for a recovery of incentive or retention compensation that is based upon materially inaccurate performance metrics.
 
The committee awarded 40 percent of the incentive compensation in equity and 60 percent payable in cash to the named executive officers who received awards, in accordance with Citi’s longstanding approach to executive compensation. However, none of the cash payable to the named executive officers who received awards was payable at the time of the award, and all of the cash compensation was awarded in the form of a deferred cash retention award, as structuring the cash award as a deferred award (instead of an immediately payable cash award) should provide better value to stockholders to the extent that it induces a key executive to remain employed at Citi.
 
All of the equity awards made to the named executive officers who received awards as well as the awards made to the remainder of the management executive committee were made in the form of performance-vesting stock and performance priced options. The performance targets were chosen based on the conversion prices of the warrants to purchase common stock issued by Citi to the U.S. Department of the Treasury on October 28, 2008 and on December 31, 2008. The performance targets are $10.61 and $17.85 and Citi stock closed at $4.53 on the date of the awards, meaning that the stock must recover significantly for the executives to receive full value. This approach enables the alignment of executives’ interests with those of taxpayers and drives performance. The executives received 30 percent of their total incentive awards in stock and 10 percent in options, in recognition that each form of equity has a different type of value to the holder.


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In deciding the nominal amount of each individual’s incentive, senior management presented a general review and evaluation of the executive officers to the committee. The evaluation was based on a review of the performance of each of the executive officers, including consideration of (a) Citi’s financial performance (such as revenue growth, expense management, reduction of balance sheet assets, net income, return on equity, and total return to stockholders), including both ongoing operations and recognized gains and unrecognized gains and losses, (b) the business practices, including an evaluation of risk management, (c) talent development, including development of diverse talent, and (d) the ability of the applicable business to execute on Citi’s strategic plan, including through successful acquisitions or divestitures.
 
The committee then determined the nominal amount of each executive’s compensation. Each of the factors comprising the performance results was considered by the committee in determining the nominal amount of each executive’s compensation. Formulaic approaches were not used to weight these factors, consistent with the committee’s and Citi’s belief that the adoption of any given formula could inadvertently encourage undesirable behavior (e.g., favoring one financial measure to the exclusion of other important values).
 
Four senior executives — the ceo, the cfo the former Chairman, and former senior counselor Robert E. Rubin — declined to be considered for incentive or retention compensation, in light of Citi’s performance and other extraordinary circumstances of 2008. The committee decided to make awards in either stock or cash to the named executive officers other than the ceo and cfo in varying amounts on a case-by-case basis. The awards were focused on the need to retain the applicable executive to provide for the future performance of Citi while also taking into account the executive’s past performance. This non-formulaic approach led to significant differences in the compensation paid to the named executive officers, as in making individual awards, the committee took into account the competitive marketplace for individuals with widely differing job responsibilities at Citi, length of service with Citi, size of the business for which they are
 
responsible, and tenure in the financial services industry.
 
Review by the chief risk officer. Citi’s chief risk officer held informal discussions with management from time to time throughout the process of structuring executive compensation to provide his preliminary views on how excessive risk taking could be mitigated through the company’s approach to executive compensation. On January 14, 2009, he discussed with the committee the short-term and long-term risks that could threaten the value of Citi and the features of Citi’s compensation arrangements in light of those risks, and delivered his report to the committee on his review of the compensation structure for senior executive officers. The report concluded that the design of the incentive compensation structure for Citi’s senior executive officers does not encourage those individuals to take unnecessary or excessive risks that threaten the value of the institution. The report furthermore concluded that the structure provides strong incentive for those executives to appropriately balance risk and reward, and aligns the interests of the executives with those of stockholders and the U.S. government.
 
The chief risk officer reached those conclusions through a three-part process: the risks were identified, the behaviors of the individuals who were compensated through the structure were assessed, and finally the compensation structure was evaluated in light of the risks and behaviors.
 
•  First, the chief risk officer evaluated the disclosures in the company’s periodic financial statements made available to the public and determined that Citi’s long-term and short-term risks are clearly set forth in the risk factors identified therein.
 
•  The chief risk officer, with the assistance of other senior risk officers, then reviewed the behavior of members of senior management to determine whether the behaviors exhibited over the course of 2008 were consistent with the new risk culture outlined by the ceo and chief risk officer. Our risk culture is based on taking intelligent risk with shared responsibility, without forsaking individual accountability.


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•  Each member of senior management was assessed according to whether he or she appropriately recognizes the stature of risk managers and the risk management organization, whether the executive recognizes risk in his or her business, and whether the executive takes appropriate steps to mitigate risks.
 
•  The chief risk officer then reviewed the proposed compensation structure, including the cash element, the performance-vesting stock and performance priced options, the “clawback,” and the limit on severance pay, and the 75 percent stock ownership commitment. The chief risk officer found that:
 
  •  The “clawback” feature supports the accuracy of Citi’s financial statements and encourages the executives to focus on maintaining accurate books and records and on complying with relevant accounting policies.
 
  •  The vesting elements of the awards as well as the maturity schedule of the options align the interests of the executives with the long-term health of the Company, the quality of earnings, the interests of
 
stockholders, and the interests of the U.S. government.
 
  •  While the exercise prices of the options and the vesting triggers for the stock were well above Citi’s current stock price, the spread was not unduly wide and the prices appropriately aligned the interest of the executives with the U.S. government and stockholders.
 
  •  The mix of cash and equity awards provided an appropriate balance between short-term and long-term risk and reward decisions.
 
Independent consultant review. After the committee determined each named executive officer’s incentive and retention compensation, icca reviewed the committee’s decisions to determine whether the compensation paid to each executive was reasonable, based on the criteria described above that were used by the committee and related results. Based on its review of the total process and results, the independent consultant determined that the committee’s decision-making process was both thoughtful and thorough and its decisions were responsible and reasonable.


 
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This excerpt taken from the C DEF 14A filed Mar 13, 2008.

Process for determining executive officer compensation

 

The role of the Personnel and Compensation Committee.    The committee is responsible for evaluating the performance of and determining the compensation for the CEO, and approves the compensation for the operating committee. The committee also approves the compensation structure for senior management groups, including the members of the business planning groups and the most senior managers of corporate staff and other highly paid professionals, in accordance with guidelines established by the committee from time to time. The committee regularly reviews the design and structure of Citi’s compensation programs to ensure that management’s interests are aligned with stockholders and that the compensation programs are aligned with Citi’s strategic priorities.

 

In furtherance of these goals, the committee has retained Independent Compensation Committee Adviser, LLC (ICCA) to provide independent evaluations and advice regarding executive compensation. ICCA does no other work for Citi, reports directly to the chair of the committee and meets with the committee in executive session, without the presence of Citi management. ICCA was asked to review the committee’s process, its decisions regarding current CEO compensation and the compensation of other members of senior management, and the reasons for reaching those decisions. The committee also relies on Mercer Human Resource Consulting to provide data, evaluations and advice regarding executive compensation. The committee instructed the consultants to meet with senior management to review Citi’s process, financial performance, and market data. The consultants were asked to evaluate the compensation recommendations for senior management in light of these factors and management’s description of the performance assessment.


 

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Benchmarking.    Near and after the end of 2007, benchmarking information on performance of peer companies and compensation at peer companies was obtained from publicly available sources and third-party proprietary databases, and reviewed by management with the compensation consultants. Compensation paid to the named executive officers is intended to be competitive with pay at peer companies, recognizing that the combination of lines of business at Citi is not replicated at any other company. The companies considered to be peers for compensation benchmarking purposes were American Express, Bank of America, Bank of New York Mellon, Capital One, Credit Suisse Group, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, Wachovia and Wells Fargo. The financial criteria benchmarked were earnings, net income after cost of capital, earnings per share growth, revenue growth, return on common equity, and criteria relating to stock price (five-year and one-year total returns, price to book value ratio, and 2007 price/earnings ratio). The benchmarking results provided background and context for committee decisions; the information regarding peer companies and pay practices of the peer group informed but did not govern the committee’s award determination for any particular named executive officer.

 

ICCA concluded that in light of the extraordinary financial upheavals that occurred at the end of 2007, there was limited meaningful guidance regarding contemporary compensation practices, as compensation data from 2006 and 2007 compensation surveys became an unreliable predictor of actual competitor compensation practices for 2007.

 

Performance evaluations and determination of the nominal amount of the awards.    In January 2008, senior management presented a general review and evaluation of the executive officers to the committee. The evaluation was based on a review of the performance of each of the executive officers by their managers against the criteria set forth in the Senior Executive Compensation

Guidelines, including (a) Citi’s financial performance (such as revenue growth, expenses, net income, return on equity, and total return to stockholders), (b) the business practices, including the overall control ratings, of the business for which the executive was responsible, (c) talent development, including development of diverse talent and improvements in objective surveys on employee-focused matters, and (d) the ability of the applicable business to execute on Citi’s strategic plan, including through successful acquisitions. Executives whose businesses performed well in the current economic environment were rewarded for strong performance in challenging times.

 

In executive session, the committee then determined the nominal amount of each executive’s compensation. The committee received an evaluation of CEO compensation from ICCA in executive session, and then determined compensation for the new CEO based on this input, the CEO’s performance and benchmarking data. Each of the factors comprising the performance results was considered by the committee in determining the nominal amount of each executive’s compensation. Formulaic approaches were not used to weight these factors, consistent with the committee’s and Citi’s belief that the adoption of any given formula could inadvertently encourage undesirable behavior (e.g., favoring one financial measure to the exclusion of other important values).

 

The committee decided to make retention awards in either stock or cash to senior executives in varying amounts on a case-by-case basis. The awards were focused on the need to retain the applicable executive to provide for the future performance of Citi while also taking into account the executive’s past performance and compensation history. In deciding to make retention awards, the committee considered each executive’s demonstrated influence with clients, employees, and shareholders at a time when Citi took measures to change senior management and improve its capital position. This non-formulaic approach led to significant differences in the


 

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compensation paid to the named executive officers, as in making individual awards, the committee must take into account the competitive marketplace for individuals with widely differing job responsibilities at Citi, length of service with Citi, size of the business for which they are responsible, and tenure in the financial services industry.

 

Citi’s CEO and three other highest-paid executive officers are subject to the Executive Performance Plan. For these executives (Mr. Pandit, Mr. Kaden, Mr. Klein and Mr. Volk), no bonus amounts were paid in respect of 2007 in accordance with the terms of that plan. The executives received retention equity awards that vest over a two- or four-year period. Mr. Kaden, Mr. Klein and Mr. Volk also received deferred cash retention awards, as described in more detail above. Mr. Pandit did not receive a deferred cash retention award. The deferred cash retention awards are in a form that aligns the ultimate value of these awards with Citi’s future performance, as the awards will increase or decrease in value according to the total return on Citi stock through the vesting date. The allocation between deferred cash and retention equity awards was made on a case-by-case basis, taking into account the relative mix of cash and stock awards received by the executives in past years and by other executives in the applicable business as well as the impact of the committee’s decisions on the composition of the Summary Compensation Table. The committee made additional awards to Mr. Pandit as described below, in recognition of his new role as CEO.

 

For the named executive officers who were not subject to the Executive Performance Plan (Sir Winfried, Mr. Crittenden and Ms. Krawcheck), the committee determined the nominal amount of the incentive and retention awards using the non-formulaic process described above, subjecting 40 percent of the award to CAP in accordance with the guidelines applicable to all employees. In contrast to previous years when 60 percent of the annual incentive and retention award was payable to senior executives in cash, the committee capped current cash compensation at 30 percent of the

award, and awarded the remaining 30 percent of the nominal amount as retention equity awards (which are explained in more detail above in this Compensation Discussion and Analysis). The committee also made additional retention equity awards of $2.5 million to Mr. Crittenden and $1.5 million to Ms. Krawcheck, to reflect their outstanding individual contributions in 2007, demand for their exceptional skills in the marketplace, and their expected contributions to the future success of Citi.

 

CAP awards are long-term incentives designed to increase retention and their value relates directly to the enhancement of stockholder value. The terms and conditions of CAP awards, including the vesting periods and provisions regarding termination of employment, are the same for the named executive officers as for all other CAP participants, and are described in more detail in the General Discussion of the Summary Compensation Table and Grants of Plan-Based Awards Table and the discussion of Potential Payments upon Termination or Change in Control below.

 

Independent consultant review.    After the committee determined each named executive officer’s incentive and retention compensation ICCA reviewed the committee’s decisions to determine whether the compensation paid to each executive was reasonable, based on the criteria described above that were used by the committee and related results. Based on its review of these factors, the independent consultant determined that the compensation awarded to each named executive officer in 2008 was reasonable.

 

Mr. Pandit.    In connection with his appointment as CEO, the committee made equity awards to Mr. Pandit in January 2008 that are designed to incentivize and reward him based on the future performance of Citi. These awards consisted of (a) 1 million shares of restricted stock vesting ratably over a four-year period (the sign-on stock award) and (b) options for 3 million shares of stock vesting ratably over a four-year period (the sign-on options). The sign-on options have a ten-year term. The exercise price of one-third of the sign-on


 

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options is equal to the grant date price ($24.40), another third have an exercise price that is 25 percent above the grant date price ($30.50) and one-third have an exercise price that is 50 percent above the grant date price ($36.60). The grant date

price of $24.40 is the closing price of Citi stock on the NYSE on the date of grant (January 22, 2008). The options will only have value to the extent that the Citi stock price exceeds each exercise price after the vesting of such options.


 

LOGO

 

This excerpt taken from the C DEF 14A filed Mar 13, 2007.

Process for determining executive officer compensation

 

The role of the Personnel and Compensation Committee.    The committee is responsible for evaluating the performance of and determining the compensation for the CEO and approving the compensation structure for senior management, including the operating committee, members of the business planning groups, the most senior managers of corporate staff and other highly paid professionals, in accordance with guidelines established by the committee from time to time. The committee regularly reviews the design and structure of Citigroup’s compensation programs to ensure that management’s interests are aligned with stockholders and that the compensation programs are aligned with Citigroup’s strategic priorities.

 

In furtherance of these goals, the committee has retained Independent Compensation Committee Adviser, LLC, to provide independent evaluations and advice regarding executive compensation. The independent consultant reports directly to the chair of the committee and meets with the committee in executive session, without the presence of management. The committee also relies on Mercer Human Resource Consulting to provide data, evaluations and advice regarding executive compensation.

 

Benchmarking.    Near and after the end of 2006, benchmarking information on performance of peer companies and compensation at peer companies was obtained from publicly available sources and third-party proprietary databases, and reviewed with the compensation consultants. Compensation paid to the named executive officers is intended to

be competitive with pay for comparable performance at peer companies, recognizing that the combination of lines of business at Citigroup is not replicated at any other company. The companies considered to be peers for compensation benchmarking purposes were ABN AMRO, AIG, American Express, Bank of America, Bank of New York, Credit Suisse Group, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JP Morgan Chase, Merrill Lynch, Morgan Stanley, UBS, Wachovia and Wells Fargo. The criteria benchmarked were earnings, earnings per share growth, revenue growth, return on common equity, and criteria relating to stock price (five-year and one-year total returns, price to book value ratio, and 2006 price/earnings ratio).

 

Performance evaluations.    Mr. Prince presented an evaluation of the executive officers who report directly to him to the committee and the independent compensation consultant. The evaluation was based on performance by each of the executive officers against the criteria set forth in detail below. The committee then evaluated the performance of Mr. Prince and Mr. Rubin, using the same criteria. The committee received an evaluation of CEO compensation from the independent compensation consultant in executive session, and then determined incentive and retention awards for the CEO and the other named executive officers based on this input, the performance results, and benchmarking data.

 

Each of the factors comprising the performance results was considered in determining each executive’s compensation. Formulaic approaches were not used to weight these factors, consistent with the committee’s and Citigroup’s belief that the adoption of any given formula could inadvertently encourage undesirable behavior (e.g., favoring one financial measure to the exclusion of other important values). Accordingly, each named executive officer’s incentive and retention compensation was determined using a balanced approach that considered, in the context of a competitive marketplace, factors contributing to the financial performance of Citigroup and the executive’s individual leadership.


 

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Performance criteria used in evaluations.    For 2006, Citigroup and individual performance were measured by evaluating the following factors against actual performance, in accordance with Citigroup’s Senior Executive Compensation Guidelines:

 

Business Practices Performance

 

•  

Developing and maintaining positive regulatory relationships around the world, and the absence of any new significant regulatory enforcement actions. Citigroup generally maintained very positive regulatory relationships around the world in 2006, and there were no major new regulatory enforcement matters last year. It is noteworthy that the Federal Reserve approved several significant acquisitions by Citigroup.

 

•  

In objective surveys, year-over-year improvements on employee-focused matters such as living the Shared Responsibilities. Employee survey scores have risen for two years, and overall employee satisfaction continued to improve on these surveys.

 

•  

Excellence in talent development, including the development of diverse talent. Citigroup demonstrated strong performance in this area by, for example, increasing exposure of members of the operating committee to Board members.

 

•  

Performance on audit and control measures improving year-over-year and exceeding Citigroup-wide audit and control performance ratings. Internal audit and control scores continued to improve during 2006 across Citigroup.

 

Financial Performance

 

•  

Organic revenue growth, in the mid-to-high single digit range for Citigroup. Revenues grew 7%, almost all of which was organic.

 

•  

Net income growth faster than revenue growth. Net income from continuing operations grew at about the same rate as total revenues (about 7% in each case).

 

•  

Return on equity in the 18-20% range for 2006 for Citigroup. The 2006 return on equity was 18.8%.

 

•  

Total return to stockholders compared to the peer companies listed above. Total return to

 

stockholders was 19.6%, which was lower than many of the listed peer companies but comparable to large money center banks.

 

Strategic Performance

 

•  

Continued execution of Citigroup’s strategic plan. Highlights included the opening of over 1,100 retail bank and consumer finance branches, partnerships with 7-Eleven, Expedia, Shell and Home Depot, and exceeding the targeted reduction in data centers.

 

•  

Performance of strategic investment initiatives, measured by contribution to earnings, returns on equity and franchise development. Performance of new investments exceeded expectations for both financial results and franchise development.

 

•  

Continued successful implementation of Citigroup’s acquisition strategy, including consideration of the impact on earnings and credit ratings. In 2006, announced strategic acquisitions or significant ownership stakes included HDFC, Akbank, Grupo Uno, Guangdong Development Bank, Grupo Cuscatlan and Quilter. In addition, certain credit ratings were upgraded in 2006.

 

After the committee determined each named executive officer’s incentive and retention compensation, the independent compensation consultant retained by the committee reviewed the committee’s decisions to determine whether the compensation paid to each executive was reasonable, based on these criteria and related results. In particular, the independent review of CEO compensation took into account positive and negative factors in Citigroup’s financial performance, the success of strategic initiatives, and the market competitiveness of total CEO compensation. Based on its review of these factors, the consultant determined that the compensation paid to each named executive officer was reasonable. Before finalizing the decisions, the committee determined that the awards were permitted under the Executive Performance Plan. For more detail on the plan, see “Tax deductibility of the named executive officers’ incentive and retention compensation” below.


 

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Equity awards.    Once the committee determined the nominal amount of the named executive officers’ incentive and retention compensation, the cash and equity components of the awards were determined under the equity plans, such that the named executive officers received 40% of their awards in restricted or deferred stock under CAP. As stated above, CAP awards are long-term incentives designed to increase retention and their value relates directly to the enhancement of

stockholder value. The terms and conditions of CAP awards, including the vesting periods, the stock option election and provisions regarding termination of employment, are the same for the named executive officers as for all other CAP participants, and are described in more detail in the General Discussion of the Summary Compensation Table and Grants of Plan-Based Awards Table and the discussion of Potential Payments Upon Termination or Change in Control below.


 

 

LOGO

 

EXCERPTS ON THIS PAGE:

DEF 14A
Mar 20, 2009
DEF 14A
Mar 13, 2008
DEF 14A
Mar 13, 2007

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