Citigroup CEO Vikram Pandit testifies before a House committee in Washington in February 2009 (Chip Somodevilla/Getty)
There’s an excellent piece in the NYTimes chronicling the many times Citigroup has risen and fallen over the last decade.
I do remember, in fact, when Sandy Weill, head of Travelers (which many of you may not realize actually evolved out of an old-style manufacturing company, American Can), proposed the idea of a financial supermarket. Naysayers and proponents butted heads, but Citicorp was born. (full disclosure: I thought it sounded like a nifty idea at the time)
Well, apparently the company has fallen on its face — correction: was about to fall on its face, except we taxpayers caught them — many times in the last decade. And while it’s profitable now, naysayers and fans are again butting heads about whether it’s a viable institution or one that is destined to fall again.
I have no opinion on that — I truly don’t know enough about CDOs and such to say whether Citigroup has a handle on them. And I have gone on the record a million times now, that I want to reenact Glass Steagall and to use existing antitrust legislation to break up any institution that is too big to fail.
But this Citigroup story also proves my point(s) about the sheer stupidity of retention bonuses at faltering companies.
Point one: Why do you want to pay extra to hold onto those executives who drove you into the ground in the first place? I love this quote from a one-time insider:
Still, the unfortunate truth about the bank during the last several years, according to analysts and former insiders, is that it was managed horribly. “They just blew it,” said one former Citigroup executive, who like many others interviewed for this article requested anonymity because of pending lawsuits and a desire to preserve relationships with former colleagues. “It’s really hard to drive the car if you don’t have the headlights on.”
Point two: Throwing money at people — which Citigroup has certainly done as much as its colleagues and competitors — makes them rich, but doesn’t make them loyal. Otherwise, how do you explain these statistics?
In the last decade, for instance, Citigroup has had four chief executives, six chief financial officers, seven heads of consumer banking and eight investment banking chiefs.
Bank of America, by contrast, has had two C.E.O.’s, four chief financial officers and one chief operating officer during the same period — though that relative stability didn’t spare the bank from mistakes and pain in the crisis.
Way I see it, Citigroup’s revolving door proves that retention bonuses don’t retain, and BankofAmerica’s stable executive suite proves that executive continuity doesn’t guarantee anything.
Time for a shareholder revolt!
new bottom line 
…why do we give government employees free health care and pensions…if we gave them less benefits and lower pay maybe they wouldn’t spend a lifetime in government sucking off the taxpayers
My T/S blog focuses on behavior that is criminal. In the corporate realm, all sorts of behaviors that ought to be illegal are allowed. Retention bonuses for top executives, stock options, golden parachutes, salaries 100 times larger than paid to workers in the factories owned by the same company and so many other perquisites are common. All should be circumscribed, by law, unless tied directly to excellent results for the shareholders and for society at large (such as environmentally sound operations).
I despair, however. Such changes almost surely will never occur short of shareholder revolts at annual meeting after annual meeting. How many shareholder revolts have you ever led, participated in, or even heard about?
The criminal justice system is changing for the better, driven in part by the embarrassment of wrongful convictions. The corporate justice system…well, that’s an oxymoron so far.
I think you want to give the government a lot more power than is healthy. I’m not at all for laws that dictate executive compensation, or that outlaw stock options, or any of that stuff. I’m for laws that empower shareholders. Say on pay, for example, is ridiculous — it would just give shareholders a non-binding advisory vote (which many companies right now do not even allow). I want a law that says shareholders can veto pay packages. And I want a law that empowers shareholders to insist that executives cannot get guaranteed bonuses — and oxymoron if ever there was one — that are not tied directly to meeting goals that the shareholders had a chance to sign off on. And as far as environmentally sound operations — that is already regulated in some areas, should most certainly be more heavily regulated in others (greenhouse gases, anyone?), and should be enforced with vigor no matter how compensation packages are set.
The article dated 1 November by Claudia Deutsch entitled, ” And Yet More Proof that Retention Bonuses are Stupid” lacks evidence to support the stated claim. Furthermore, the article lacks an understanding of retention bonuses.
Ssnior corporate officers such as CEOs, CFO, COO and general managers do not costumarily receive retention bonuses.
In commerce and industry, operations that are complex or quickly growing, or both, staffing levels tend to be understaffed. If the unit has more staff turnover than ordinary such as brought about by outside forces, such as financial stress upon the firm or unit or government meddling, it may be criticial that a few key staff remain who understand the business. Retention bonuses generally apply is such circumstances. Most senior officers aren’t found of them but there is most choice when there is greater risk key staff may walk.
In the case where the total firm is in difficult times or it has been acquired, the board certainly wants key people to remain. It may employ servial devices to keep them. But this didn’t apply to Citi or B of A during the time period in Ms. Deutsch’s article.
Hey, do I believe that key people are needed to see a company through a difficult merger or such? You bet I do. It is common practice — and I think good practice — to offer bonuses to people to stay until a merger is complete, for example, or to wind down a division that is being shuttered. But these are cases where the retention bonus is exactly that — a sum of money that was never part of the pay package before, and that is being offered now as an enticement to people to stay for a specified period, with the understanding that their jobs will probably disappear at the end of that period.
What I’m railing about — and I don’t retract any of it — is that the big banks have said that their “guaranteed bonuses” to top honchos, including CEOs and CFOs and such, are necessary to prevent them from going to other jobs. They are simply renaming their bonuses as retention bonuses. And I think it’s a crock…
Michael Lewis once wrote a brilliant article about the collapse of AIG Financial Products. AIG FP, as most will recall, was the division of the massive insurer that wandered off the reservation and traded wildly in credit derivatives.
At any rate, Lewis’ article describes in detail how few of these people understood how perilous their business practices were, and those who ran the division went ahead with their insane business practices despite warnings to the contrary. Nevertheless, they were retained on contracts of up to $1 million a month to keep their “talent” around.
http://www.vanityfair.com/politics/features/2009/08/aig200908
More smoke and mirrors from the Wall Street elite to try and hold on to the culture that created this collapse. The Government needs to set the tone for change however to encourage shareholders because this shareholder voting system is rigged to favor the Board in most instances. Thanks for bringing this out; if not for the blogs these issues would not even be discussed.
Thanx — people will often take the time to disagree — vehemently — but far fewer take the time to agree. Appreciated!
Claudia,
You’ve argued very consistently that shareholder power is the right way to right corporate evil-doing. And in the abstract, I agree with you; surely responsible shareholders would want to protect their investment by researching and approving only those directors and motions that are in the company’s best long-term interest.
In reality, only a few large mutual funds and pension plans own enough of any stock to make a difference vs the entrenched interests even of widely held issues. While CALPERS has occasionally been activist, most large holders of common stock are on the side of the bad guys.
While I applaud your idealism, I don’t think it works.
But it is my cynicism, not my idealism, that makes me think it’ll work just fine. In some cases — you mention Calpers, I’ll add TIAA-Cref and a few green funds — the big institutional investors have come out as activists. But in most cases they are run by money guys, who are in it for the same reasons as the bankers and traders and such: They want to make mucho money. And I think they will do anything they can to prevent the companies whose shares they own from squandering their money.
חֻצְפָּה -> needed
but lacking
That is all 🙂
Cheers
Olga Shulman Lednichenko
Your pitch should have said something about retention bonuses are being misused rather than being stupid which is an altogether diffent meaning.
Integrity is the corner stone of commerence and industry, and the coin of the realm.
A retention bonus that is wrong, calling a regular bonus a retention bonus or anything else off is a matter for the board of directors.
There are many save guards. There is the SEC, other federal or state agencies and trial lawyers.
we’re inching closer to agreement, you and me, but we ain’t there yet.
If the SEC was an effective safeguard, we wouldn’t have Bernie Madoff. If boards were effective safeguards, excessive compensation wouldn’t be an issue.
I think retention bonuses make sense when they are linked to a particular task, with the understanding that once that task is complete the bonus will be paid and the exec is free to go — or more likely, will find his/her job abolished. That’s what happens with integrating merged companies, with winding down closed plants, etc. Otherwise, I think they are stupid at best, immoral and smacking of collusion at worst.
This chat is moving from economics and seemingly headed toward human nature. Checks and balances, oversite or monitoring are effective tools. They don’t always work, and sometimes improvements are required. But third party regulation is difficult to impossible. Appropiate regulation to ensure that financial speculative activities don’t end in ruin is impossible to achieve. There are enough laws on the federal books to put every citizen in jail. More laws usually provide little economic benefit other than making congress look good and enrich the legal trade, but more laws can impede business and most likely will.
Compensation is a complex transaction. I think it’s probably best left to the transaction parties. You may think as a trader I don’t deserve my supper. A classical musician complained that a famous rock star made more money in a single show than she did in a month. I sometimes grouse about the average pay of a baseball player. Wall Street has become the whiping boy. They didn’t cause the financial crisis, but the Administration and Congress certainly think they did.
Unless one fully understands the cause of a problem, it’s impossible to craft an appropiate solution or remedy. But there’s no law on the books for stupidity. And that is a shame