Citigroup (C) Adopts New Executive Compensation Structure

February 21, 2013 4:29 PM EST
On February 19, 2013, the Personnel and Compensation Committee of the Citigroup Inc. Board of Directors (the “Committee”) awarded incentive compensation for the 2012 performance year to senior executives of Citigroup Inc. (NYSE: C). These awards and their new structure reflect both our performance for the year and changes to the structure of our overall compensation system, which are responsive to the significant shareholder input gathered by the Committee in response to the 2012 advisory vote on executive compensation (“say-on pay”).

"When our shareholders spoke last year about Citi's compensation structure, we listened,” said Michael O’Neill, Chairman of the Board and Chairman of the Personnel and Compensation Committee. “Since last spring, we have stepped up our efforts to solicit feedback from investors to better understand their concerns. As a result of this process, we are introducing a new compensation structure that more strongly connects compensation with performance, emphasizes strong risk management, and is both competitive and in line with regulatory standards."


Citi is adopting a new executive compensation program that uses a scorecard-based structure preferred by many of Citi’s investors. This program replaces the prior executive compensation structure, which, as is common practice in the financial services industry, involved a high degree of discretion.

Commencing in 2013, incentive compensation awards will be determined based on pre-defined performance goals established at the beginning of the year for each executive officer. At year-end, the Committee will evaluate performance against the pre-determined goals, as well as expected changes in market compensation levels and other factors considered to be relevant. The Committee will then determine the amount of actual variable incentives to be delivered to Citi’s chief executive officer (“CEO”) and approve awards for other executive officers reflecting recommendations made by the CEO for the year.

In addition, as a component of this new program, Citi has introduced performance share unit awards that will account for a portion of annual incentive compensation, in an effort to strengthen the existing links between pay and performance. This structure is in effect for Citi’s 2013 named executive officers for performance in 2012, as described below.1 The target value of each executive’s performance share unit award is based on prior year performance, with the actual number of performance share units earned at the end of a three-year period based on pre-set financial metrics. Performance share unit awards will be a key element of Citi’s executive compensation program going forward, and for 2012 represent 30% of the total incentive award as described below.

Because the newly adopted approach was developed throughout 2012 and therefore was not in place at the beginning of the year, the Committee used a hybrid approach with respect to the determination of the amount of incentive compensation delivered in 2013 for 2012 performance. Under this approach, the Committee made decisions regarding the size of the incentive awards for the named executive officers based on a review of the scorecard metrics that are expected to play a role for 2013. The resulting incentive awards for 2012 were delivered to the 2013 named executive officers as follows: 40% in cash bonus, 30% in deferred stock awards with four-year vesting that also require cancellation of nonvested amounts in the event of Citi losses, and 30% in performance share units. The performance share units will be earned at the end of 2015 based on relative total shareholder return compared to peers and return on assets, each as measured over a three-year period covering 2013 through 2015, with the actual number of units earned ranging from 0% to 150% of the target opportunity and subject to potential further downward adjustment under certain circumstances as described below.

As a result of last year’s say-on-pay vote, Citi immediately enhanced its efforts to solicit feedback from shareholders to better understand their concerns. In meetings with nearly 20 shareholders led by Mr. O’Neill, members of the Board and/or management talked with investors who collectively held more than 30% of Citi’s common shares counted towards the total vote. They also met with proxy advisory firms to determine whether the views of the proxy advisors regarding Citi’s pay practices were similar to the views of Citi shareholders.

The Committee, with assistance from its independent compensation consultant, Frederic W. Cook & Co., considered the opinions heard during these meetings and reviewed the results of the meetings with the full Board and management over several months. While investors had varying perspectives, all investors asked that the existing connection between pay and performance be enhanced.

The Committee awarded deferred stock under Citi’s Capital Accumulation Program to Mr. Corbat and the other eligible named executive officers as 30% of their incentive compensation for 2012. The awards have the same terms as the Capital Accumulation Program awards made to other senior employees, and accordingly, align the named executive officers not only with the interests of shareholders, but also with the incentives for other senior executives. The awards vest ratably over a four-year period, and an additional performance-based vesting condition also applies to these awards that allows for cancellation of future vestings in the event of losses. If Citigroup has pre-tax losses in any year of the deferral period, the portion of the deferred stock award that is scheduled to vest in the year following the loss year will be reduced by 20%, or if greater, by a fraction, the numerator of which is the amount of the pre-tax loss, and the denominator of which is the highest level of annual pre-tax profit for Citigroup in the three years immediately prior to the loss year. This provision of Citi’s Capital Accumulation Program is new for 2012. Other provisions of these deferred stock awards are the same as or similar to provisions of awards made under this program in prior years.

These awards, like all deferred incentive awards granted by Citi, remain subject to cancellation pursuant to the “Citi Clawbacks.” In general, the Citi Clawbacks provide for the forfeiture or cancellation of nonvested incentive compensation if the Committee determines that the employee (a) received an award based on materially inaccurate publicly reported financial statements, (b) knowingly engaged in providing materially inaccurate information relating to publicly reported financial statements, (c) materially violated any risk limits established or revised by senior management and/or risk management, or (d) engaged in gross misconduct.

* Performance Share Unit Awards

The performance share units will be delivered at the end of a three-year performance period only to the extent that Citi achieves pre-determined objective goals over that period. These goals – return on assets and relative total shareholder return – were selected because they measure improvement in Citi’s operating performance and relative returns delivered to shareholders, respectively. Citi believes that these metrics are the most relevant objective measures of overall improvements in performance at this point in Citi’s evolution.

Performance share units are performance-sensitive in a variety of ways. First, the initial award opportunity is based on prior-year performance. Once granted, the number of performance share units earned, if any, is based on performance against the objective metrics over the three-year performance period. Finally, the value of the earned performance share units is based on changes in Citi’s common stock price that occur over the three-year period.

For more color from the SEC filing, click here.

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