Citigroup Inc. (C) CEO Mr. Vikram Pandit has been awarded with a retention package to keep him in office at least through 2015. He would get over $16 million as well as stock options if he achieves certain performance targets. The exact value of the award will thus depend on successful deployment and execution of strategies approved by Citi’s board of directors.
Citi suffered severe losses during the financial crisis and ultimately had to be bailed out by the government. Mr. Pandit, took over as Citi’s CEO in December 2007. Then, in 2009, he voluntarily slashed his salary to $1 a year until the company returned to profitability.
After suffering billions in losses in 2008 and 2009, Citi ultimately swung back in 2010, posting a profit of $10.6 billion. Going the current look of things, Citi finally increased Pandit’s salary to $1.75 million per annum this January.
According to the chairman of Citi’s board, the long-term, multi-year, performance-based structure of the retention award is aimed at retaining Mr. Pandit in his current position and rewarding him for his future feats that would benefit Citi and its shareholders.
Components of the Retention Award
The first component of the retention award is in deferred stock of $10 million, which Mr. Pandit will receive in three equal installments: at the end of 2013, 2014 and 2015. However, he will receive them only if the board finds that he has satisfied three key areas related to the sustainability of Citi.
These conditions include achieving regulatory requirements and Citi-wide risk management efforts, developing an organizational culture and establishing succession plans across a broad group of senior managers.
Vested shares will be subject to a sale restriction until December 31, 2015. The board will meet before each vesting date to gauge Pandit’s performance and then decide whether to vest the applicable tranche in full or cause the tranche to be entirely forfeited.
The second component of the retention award is basically a Key Employee Profit Sharing Plan (KEPSP) award. Mr. Pandit will have the opportunity to receive payments based on a specified percentage of the cumulative pre-tax income of Citicorp for 2011 and 2012. This is worth at least $6.7 million in cash payments.
He will not be entitled to any payment unless cumulative pre-tax income for this period is at least $12 billion. Initial two-thirds of the award is payable on May 17, 2013 and the remaining one-third will be disbursed on May 17, 2014. This remaining one-third amount will be reduced to the extent of any Citicorp pre-tax losses for 2013.
The third and the final component comprise 500,000 stock options with performance-based exercise prices. A group of 300,000 shares comes with an exercise price at Tuesday's market close of $41.54 a share, 100,000 options have an above-market exercise price of $52.50; and 100,000 options have an above-market exercise price of $60.00. This can be exercised in three installments starting next year and have a 10-year term.
Our Take
Under Pandit’s leadership, Citi continues to focus on profitability, shed its non-core operations. Citi’s core business, Citicorp, remains alluring and its unique franchise allows clients to access high growth foreign markets. While the top-line headwind continues at Citi, the continuation of the run down of its legacy problem assets would free up capital for the company and help invest in its core business. Lesser exposure to private-label mortgage put-back risk and an improvement in the overall economy would augment its earnings in the days ahead.
Citi had already repaid the federal aid and recently opted for a 1-for-10 reverse stock split aimed at luring institutional investors and escape form the single-digit stock price stigma for Citi that prevailed despite positive developments like profit and balance sheet improvements since 2010.
Moreover, with its peers JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) trading in the double-digit range, the reverse split was an obvious choice for management to increase the stock price from the single-digit range.
However, the retention reward has also gathered some criticism as Citi stock has underperformed compared to its peers since his joining and as the package does not take into account the losses at Citi Holdings, which the company wants to get rid of by divesting and still remains a drag on the company’s earnings.
Citi shares maintain a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.
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