Corporate Governance

Citigroup, Bonuses, and the Obama Administration in the Hot Seat

By J. Robert Brown

Reports in the WSJ indicate that Citigroup is asking Timothy Geithener, the Secretary of the Treasury, for permission to pay certain employee bonuses.  Some of the sought after bonuses would compensate employees in the financial institution's energy trading unit.  In addition, however, Citigroup is seeking approval for a broader category of employees.  As the article noted:

• Citigroup is trying to get U.S. approval for special bonuses for many of its employees. In a meeting earlier this month with Treasury Secretary Timothy Geithner, Citigroup CEO Vikram Pandit made the case for the stock-based bonuses. Executives are describing the bonuses as "retention" awards to perk up demoralized employees who the company worries are vulnerable to poaching by rival firms, people familiar with the matter said.

Lets stand back and consider this matter.  First, it may well be the case that some bonuses are necessary to keep good employees.  One suspects that the Energy Trading Division is a place where this is the case.  It shows that when limits exist in one business, top employees in fact may jump ship and go to other companies not subject to comparable limits.  In other words, this makes the case for broader limits on compensation, beyond those companies receiving TARP funds.

It also shows the complete absence in trust in the current system for determining compensation.  The fact that these bonuses are in play is a result of a failure of the Delaware Model, a system that defers to management without significant oversight or limitations.  Ironically, most of the criticism has focused on top officers (particularly the CEO), not persons on a trading desk.  Nonetheless, because of the profligate behavior in paying top officers, TARP companies are finding their hands tied even for employees of lesser rank.

Second, the payments put Geithner in a tough bind.  He is now becoming the arbiter of corporate compensation, something that is not his job and results in politicizing compensation.  On the one hand, Citigroup probably ought to pay all or some of the bonuses.  On the other hand, if Geithner allows the payments, he will be subject to public criticism.  He is likely to allow some but not all.  The number, however, will clearly be influenced by the perceived public reaction.  There will be some employees of Citigroup who do not get a bonus or get a smaller bonus for political rather than economic reasons.

The two problems, then, intersect.  Treasury ought not to be, and doesn't want to be, in the business of determining compensation.  But the system for determining compensation (the Delaware model) isn't working and can't be trusted.  What to do?  Fix the model (we've made our suggestion) and leave matters to the board.

Full post as published by The Race to the Bottom on April 29, 2009 (boomark / email).