This year, I introduced a new weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week I’m going to stick with the financial sector for a second week in a row and highlight Citigroup (NYSE: C ) CEO Vikram Pandit.
The dunce cap
Just two weeks ago I praised Vikram Pandit for doing the honorable thing and taking home a $1 yearly salary while his bank languished during the recession. Then last week, before the ink was even dry, Pandit did a complete 180 and decided it was time to boost his total compensation back to $15 million from $1.
Pandit originally stated that he would take only $1 in compensation until Citigroup was profitable once again, and he did indeed stick by his word longer than he needed to. Citigroup turned a profit in 2010 and Pandit chose to continue his $1-per-year salary. So why, after an $11 billion profit in 2011, would I deride what I feel is a callous move? There are so many places to start…where to begin?
How about that Pandit chose to implement these pay raises during a year in which his company agreed to settle with the SEC for $285 million for the sale of toxic mortgage debt. In a truly interesting twist, in November, U.S. District Court judge Jed Rakoff rejected the settlement on the grounds that Citigroup did not admit to wrongdoing, yet was willing to pay the fine! The judge’s contention is that Citigroup could be skirting by with minimal charges if it doesn’t own up to its wrongdoing. The case is currently pending in an appellate court.
To the corner, Mr. Pandit
But wait -- there’s more!
The pay raises and bonuses weren’t just confined to the CEO position. Champagne bottles were uncorked directly in the eyes of investors by most of Citigroup’s management team. CFO John Gerspach saw his pay rise 51%, and president John Havens enjoyed a 36% bump in his total compensation. All told, the top four executives at Citigroup took home $43 million in 2011 -- a 34% increase over 2010. What about Citigroup’s employees, you might be wondering? They got a token 5% pay raise, while 4,500 others are in the process of receiving a pink slip. Nice, Mr. Pandit. Real nice.
The pay raises are really a head-scratcher when you take into account that most Wall Street firms, by their own admission, were cutting back on bonuses and investment banker pay. Lloyd Blankfein and many Goldman Sachs (NYSE: GS ) executives managed to cut bonuses by 21% from 2010. At Credit Suisse (NYSE: CS ) , senior investment bankers have seen their pay reduced by 30%. Even JPMorgan Chase (NYSE: JPM ) , which is arguably one of the healthiest financial institutions in the country, has reduced the average salary of its investment bankers by 9%.
Perhaps the most profound “Seriously?” moment came in July 2007, just five months before Pandit was hired to run Citigroup. Pandit, who at the time was running Old Lane Partners hedge fund, sold this hedge fund to Citigroup for $800 million. Pandit pocketed $165 million in the transaction for his stake. As for Old Lane, the hedge fund was closed down about one year later under Pandit’s watch.
Since then, Pandit has continued to purchase other hedge funds and invest the company’s own money back into its hedge fund division known as Citi Capital Advisors. In 2011, five of the seven hedge funds that comprise CCA lost money with four of seven underperforming the indexes since inception. CCA’s funds under management have dropped from $59 billion in 2007 to just $18.6 billion as of last year. Some of this is attributed to investors fleeing with their money as the market crashed, but this appears to be a conspicuous trend for hedge funds run by Vikram Pandit.
Do I think Vikram Pandit deserved a raise? Uh, no! I think investors should instead send him a bill!
Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.
And if you'd like a surefire way to avoid investing in companies with questionable leadership practices, I invite you to download a copy of our latest special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report contains a wide array of companies and sectors that are likely to keep your best interests in mind, regardless of whether the market is up or down. Best of all, it's completely free for a limited time, so don't miss out!