The public is at something of a loss when it comes to judging whether big banks are following new rules that are meant to make them less risky.
But tracking banker compensation is not a bad way to start. Indeed, Citigroup’s 2014 proxy report, which was released on Wednesday, has some intriguing disclosures on pay that allow outsiders to partially weigh the degree to which a large institution is using compensation to hold its senior executives accountable.
The authorities used to take a hands-off stance toward Wall Street compensation. But after the financial crisis of 2008, regulators around the world decided that the banks they oversaw needed to remove incentives that fueled dangerous levels of short-term risk-taking. That meant doing away with big cash bonuses that rewarded bankers upfront, even though their businesses might blow up later. Instead, the regulators pressed banks to stagger the payment of bonuses over several years. The idea is that if a trade or deal goes bad in the future, the bank can “claw back†the deferred pay before employees who committed the missteps actually receive it.
In its proxy, Citigroup described a new set of conditions called the general clawback.
Under this, pay can be taken back if the company’s compensation committee determines that an employee “exercised materially imprudent judgment that caused harm to any of Citi’s business operations.â€
Citigroup’s clawback rules also say the bank will move to recoup pay if an employee “materially violated any risk limits established or revised by senior management and/or risk management.†In other words, a trader can make a profit but will still be penalized if it was achieved in a way that merely risked outsize losses.
Citigroup’s proxy contains detailed scorecards for a handful of its most senior executives, laying out the metrics used to assess their compensation. Some of them are financial, which drove 70 percent of the assessment of Michael L. Corbat, the bank’s chief executive.
The other 30 percent are driven by nonfinancial metrics. One of them has to do with maintaining good relations with external stakeholders, which include regulators. In theory, then, Mr. Corbat could have some pay docked if relations with regulators deteriorated. The report card suggests that Mr. Corbat performed well on the nonfinancial goals.
The proxy also gives some specific details about the bank’s attempts to tweak pay to penalize poor performance.
Regulators rebuked a Citigroup affiliate called Banamex USA in 2012 and 2013 for lacking effective oversight of anti-money laundering compliance. That failing was noted in the scorecard of Manuel Medina-Mora, the chief executive of Citigroup’s consumer bank. His overall pay for 2013 was $14 million, down from $15.1 million a year earlier.
The decline for Mr. Medina-Mora was not large. But the scrutiny of Mr. Medina-Mora’s pay may only intensify now that other problems have surfaced at Banamex.
Citigroup said late last month that the unit was a victim of a $400 million fraud committed by a Mexican oil-services company. The proxy, however, sends mixed messages on how the fraud affected compensation.
It says the fraud led to a $40 million reduction in variable pay at Banamex without saying whose pay was cut. But the proxy also says that the fraud has not yet prompted the compensation committee to reduce performance pay for 2013, including the compensation for senior executives like Mr. Medina-Mora. The proxy said the committee refrained in part because a review of the fraud had not been completed. It also said that the financial effect of the fraud on executive performance metrics was “minimal.â€
Though the proxy did hold out the possibility of cutting that pay when the review was complete, something of a mystery remains. Citi decided to immediately cut Banamex pay by $40 million, but it held back from cutting performance pay until the review is over. Why the different treatment?
