JPMorgan and Citigroup to “rethink” Executive Compensation

By Greg Ruel – Senior Research Associate

According to the Wall Street Journal, banking giant JPMorgan Chase & Co. (JPM) is considering bonus cuts for senior managers, including CEO Jamie Dimon. Though details are few, JPM’s board is expected to slash executive bonuses in an about face on executive compensation following an estimated $5.8 billion in credit derivative trade losses this year. The compensation committee certainly won’t have to fiddle with current performance metrics to reduce bonuses. Bonuses at JPMorgan are at the discretion of the compensation committee, averaging $4.4 million per named executive officer in 2011 and $4.7 million the year before.

Citigroup meanwhile is grappling with how to improve pay practices following its surprising advisory pay vote failure in April. At the time, board chairman Dick Parsons called the rejection a “serious matter” and pledged to actively counsel with key shareholders on compensation policy. Following the failed vote, the board has hired a new compensation consultant and looks to win “broader support among investors”, according to the Journal.  Similar to compensation at JPMorgan, executive pay at Citigroup is determined largely on the compensation committee’s assessment of discretionary elements.

Truth be told, neither of these banks has been eager to hold pay to any meaningful performance standard. For instance, each year, executives at JPMorgan receive bonuses with tidy rounded figures ending in a lot of zeroes, a sure sign for discretionary bonuses. The company does not even disclose a category for Non-Equity Incentive Compensation, the bonus category based on pre-determined performance metrics, because at JPMorgan, there are no pre-determined performance metrics. For compensation year 2011, the bonus for CEO Jamie Dimon was based on “continued leadership and several financial metrics”. Monday-morning quarterbacking financial metrics which happened to improve isn’t good enough. For those non-U.S. readers, Monday-morning quarterbacking is a reference to rewarding with the benefit of hindsight rather than sticking to a pre-determined reward system.

Equity granted to NEO’s at JPMorgan in fiscal 2011 consisted of stock appreciation rights and restricted stock units that vest ratably over time. These awards amounted to an even $17 million in grant date value for the CEO in 2011 alone. For 2012, the company added protection-based vesting conditions to equity awards. In accordance, half of RSU’s scheduled to vest in 2015 will be cancelled if the company does not meet a 15% Cumulative Return on Tangible Common Equity over the period 2012, 2013 and 2014. Also to its credit, JP Morgan has long-standing recovery provisions for incentive compensation. Recovery of incentive awards for “appropriate circumstances” is permitted and the company is expected to clawback millions from executives at the heart of the trading disaster.

In addition to its failed Say on Pay vote, Citigroup failed a spring stress test used to determine whether America’s largest financial institutions could survive another sever economic downturn. The stress test failure came just a month after Citigroup and four other U.S. banks agreed to pay U.S. government $25B to end an investigation into abusive foreclosure practices in connection with the collapse of the housing bubble. In the wake of recent upheaval, you’d think the company would be eager to appease shareholders with some governance improvements.

However, following a release from TARP restrictions in 2011, CEO Vikram Pandit’s base salary was soon increased to $1.75 million, or 75% over the IRC tax deductibility limit. Additionally, he received an aggregate mega-grant of 500,000 time-vesting stock options valued at more than $7.8 million in fiscal 2011. Citigroup does have some performance conditions attached to its most recent equity grants but they are discretionary. Deferred stock awards granted to Mr. Pandit scheduled to vest in 2013, 2014, 2015, will only vest if the compensation committee is satisfied with regulatory considerations, organizational culture, and talent development.

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