Citigroup Inc. (C) devised a new compensation plan for its executives tied to the company’s profits in its core business in the upcoming years. Under the plan, executives would receive cash bonus as a specified percentage of the cumulative pre-tax income of Citicorp, its portfolio of core business, for 2011 and 2012.
According to the new plan, Citi executives would be entitled to receive any payment only if cumulative pre-tax income exceeds $12 billion. Cumulative pre-tax income refers to income (loss) from continuing operations before taxes of Citigroup Inc. less the income (loss) from continuing operations before taxes of Citi Holdings.
According to the filing with the Securities and Exchange Commission that Citi made for this purpose, the specific percentage is 0.0144172% of cumulative pre-tax income for John Gerspach, Citi’s Chief Financial Officer. The percentage is 0.0432516% for John Havens, President and Chief Operating Officer of Citi and CEO, Institutional Clients Group; 0.0221803% for Medina-Mora, CEO, Consumer Banking for the Americas, Chairman of the Global Consumer Council and Chairman and CEO of Latin America and Mexico; and 0.0189162% for Alberto Verme, CEO of Europe, the Middle East and Africa.
If the threshold performance of $12 billion is met, these percentages would result in $11.9 million as bonus to these executives. Two-thirds of the payout would be made to the executives in January 2013, and the remaining one third, which would be subject to reduction if the company incurs a loss, would be paid in January 2014. Both these payments are to be made in cash.
As a general rule, the executive must remain employed through the applicable payment date. Also, the compensation committee needs to certify that there has not been a material adverse change in the risk profile of Citi or Citibank, N.A. during the applicable performance period.
This new compensation plan of Citi intends to redefine executives’ focus on the long-term performance of the company and balance incentives and risk, thereby aligning their compensation packages with the interest of Citi’s shareholders and other stakeholders. Besides Citi, the other Wall Street biggies such as Morgan Stanley (MS) and Bank of America Corp. (BAC) have opted for similar incentive plans, which are tied to the company’s performance.
The profit sharing compensation plan is a positive for the company. Such a plan would encourage executives to make efforts for incremental profits without undertaking risky strategies.
Currently, Citi shares have a Zacks #4 Rank, which translates into a short-term Sell recommendation. However, considering the company’s fundamentals, we have a Neutral recommendation on the stock.