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Here's One Way Huge Companies Aren't Too Big to Fail

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Sorry, big bankers and other bigwigs in corporate America. Some companies may be deemed "too big to fail" in the government's eyes, but that doesn't mean shareholders won't give the top brass a big, fat F for failure if it's warranted. Case in point: a majority of Citigroup (NYSE: C  ) shareholders just voted against CEO Vikram Pandit's compensation package.

Oh, snap!

F is for FAIL
Citigroup conducted some damage control after the financial crisis and the "too big to fail" fiasco; Pandit took a much-publicized $1 salary. Still, signs lived on that humility in light of government bailout funds might be sorely lacking. For example, jaws dropped when Citigroup went through with the purchase of a $50 million corporate jet in 2009.

How soon they forget -- or at least, hope that shareholders will forget. Last year, Pandit's total compensation reached $15 million, including a bonus of about $5 million, not to mention a retention bonus of $10 million payable after 2013 if some squishy, non-financial elements of "performance" are met. While Pandit's raking in the millions, Citigroup's stock has fallen about 23% in the last year.

An even more damning fact than stock performance is that out of 19 banks, Citigroup was one of just four that failed the Federal Reserve's bank stress tests recently. Fortunately, the 55% of shareholders who voted against Pandit's pay package probably hadn't forgotten that very pertinent nugget of information.

GMI Ratings president and CEO Richard Bennett also reminded us in a post that Citigroup was part of a group of five banks that settled with the government for $25 billion, ending investigations into allegedly abusive mortgage practices.

GMI Ratings, which provides global corporate governance and environmental, social, and governance, or ESG, research, has given Citigroup a different kind of failing grade: It's dubbed the company's accounting as "very aggressive" and gives it an ESG rating of F.

More smackdowns ahead?
So far this proxy season, Citigroup's failed say-on-pay vote stands out, big-time, compared to other say-on-pay failures like those of lesser-known International Game Technology and Actuant.

Of course, the annual meeting season isn't over yet, either. Last November, GMI identified a long list of possible say-on-pay failures for 2012, including major companies like Safeway (NYSE: SWY  ) , Pfizer (NYSE: PFE  ) , and Amgen (Nasdaq: AMGN  ) .

Why might some corporate managements and boards find their metaphorical buns particularly toasted in the proverbial hot seat? They gained less than 70% approval from their shareholders in last year's say-on-pay votes, putting them at risk for continued shareholder dissatisfaction with CEO pay versus company performance.

The possibility of say-on-pay defeats doesn't come out of left field, either. Safeway's doling out of discretionary bonuses, Pfizer's payments to departing CEO Jeffrey Kindler (apparently dreamed up on departure), and Amgen's 37% increase in CEO Kevin Sharer's pay despite the company's layoffs and share price decrease in 2010 add fuel to the idea that shareholders could deliver a failing grade to such companies' compensation schemes this year.

Safeway, Pfizer, and Amgen will hold their annual meetings on May 15, April 26, and May 23, respectively, for those following along at home.

Good news for shareholders
Shareholders delivering a major snubbing to a massive financial firm like Citigroup is the best news I've heard in a while. Shareholders are beginning to care, pushing for executive pay to be linked to true performance. Although say-on-pay votes are non-binding, such rejections send a powerful message, even to huge companies like Citigroup.

No company should ever have been too big to fail. Fortunately, shareholders are voicing opposition to compensation packages that, in a rational world, are too big to pass. That's good news for all investors; the true spirit of capitalism -- rewarding merit and instilling a fear of failure -- is reemerging in our marketplace.

Check back at every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Citigroup. Motley Fool newsletter services have recommended buying shares of Pfizer and Actuant. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2012, at 9:59 AM, JimmyZangwow wrote:

    When a company pays a fat exit bonus to executives that presided over systemic failures in corporate finance, what would you say the primary reason is (e.g. friendship with the people who can authorize such a payment, or desire for amicably sending off someone who might be useful at some point in the future?)???

    Maybe the position of CEO is an anachronism, given that most corporations are not individual proprietorships. So why should there be one person that everybody points at and says, "there is the reason our share value tanked"

  • Report this Comment On April 20, 2012, at 1:19 PM, DJDynamicNC wrote:

    These say-on-pay votes are a great idea and one of the most underrated aspects of the Obama administration's Dodd-Frank financial reform. Perceptions matter, and seeing your CEO get smacked down by the shareholders in such a public manner carries some weight.

    Currently all the incentives are aligned for CEOs to simply keep escalating and inflating their compensation, since the boards of directors to whom they must turn for the votes are often themselves CEOs, and there are strong social norms within that community towards compensation inflation. The addition of a social pressure disincentive to the mix is a great step. Obviously more could be done, but at least we're starting to line up some incentives towards the more optimal policy.

  • Report this Comment On April 22, 2012, at 11:00 AM, wrenchbender57 wrote:

    Jimmy, The CEO is not totally responsible for share price. That part of your statement is true. OTOH, someone has to be the leader of a company. That is usually the CEO's job, as I understand it. So, he/she is ultimately responsible for profits or losses, how assets are deployed, etc.. It is ridiculous for the leaders of any business to get a bonus in a year where the company is worse off than it was the year before.

  • Report this Comment On April 23, 2012, at 6:58 AM, skypilot2005 wrote:



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