Opponents of Mr. Pandit’s pay package contend that it is not linked closely enough to performance. But in a world where corporate performance is heavily influenced by government action, CEOs are likely to be judged by their ability to influence government.
There is a lot of talk this week about Citigroup shareholders’ rejection of CEO Vikram Pandit’s $15 million pay package. The shareholders voiced their discontent in an advisory vote on Tuesday. Citi’s board will have to decide how to proceed. The more interesting issue, though, is why the shareholders are not bigger fans of Mr. Pandit. After all, he presided over Citi during the financial crisis and managed to get some pretty hefty handouts from Uncle Sam.
The government went to extraordinary lengths to ensure that Citigroup survived the financial crisis. Just read these lines from the TARP watchdog’s report on the government’s assistance to Citi:
Late on November 23, 2008, following a frantic few days dubbed “Citi Weekend,” Citigroup agreed to a Government proposal that would provide Citigroup asset guarantees and a $20 billion capital infusion in exchange for preferred shares of Citigroup stock. The essential purpose of the deal, as then-Treasury Secretary Henry Paulson and then-Federal Reserve Bank of New York President Timothy F. Geithner later confirmed to SIGTARP, was to assure the world that the Government was not going to let Citigroup fail.
The November 2008 bailout followed Citi’s receipt the month before of $25 billion in TARP funds.
Pandit’s ability to navigate Washington might be a more important skill than his ability to respond to market forces. In the post-Dodd-Frank world, several big banks are poised to prosper at the expense of their smaller rivals, so having a CEO that knows how to sweet-talk the government is an asset.
Big financial firms are thriving under the regulatory cover of Dodd-Frank, while small banks are choking in the web of new regulations. Smaller firms can’t afford the legions of lawyers to pore through regulatory provisions looking for loopholes and advise on compliance. From the government’s perspective, working with several large firms is easier than dealing with lots of smaller players. It’s a nice trade-off – regulators can pull a few strings to move the whole financial industry, and large banks enjoy protection from their regulators.
Opponents of Mr. Pandit’s pay package contend that it is not linked closely enough to performance. But in a world where corporate performance is heavily influenced by government action, CEOs are likely to be judged by their ability to influence government.