Posted on 10 Sep 2012
Directors at J.P. Morgan Chase and Citigroup Inc. are looking at new approaches to executive compensation, in a bid to respond to a series of management miscues this year, said people close to the institutions.
At J.P. Morgan, the biggest U.S. bank by assets, directors are considering lower 2012 bonuses for Chief Executive James Dimon and other top executives in the wake of a multibillion-dollar trading disaster, said people close to the discussions. But they also are grappling with the question of how to do that without drastically reducing the executives' take-home pay, the people said. More than 93% of Mr. Dimon's $23 million in compensation last year came from either stock- or cash-based bonuses.
Citigroup's board, meanwhile, is expected to decide this fall how to fine-tune next year's compensation plan to win broader support among investors, people familiar with the situation said. The third-biggest U.S. banking company by assets suffered a rare rebuke from shareholders in April when they rejected management's pay structure in a nonbinding vote. The board since then has hired a new compensation consultant, Daniel Ryterband, president of Frederic W. Cook & Co., said people close to the board.
Many big U.S. banks are wrestling with executive pay amid soft financial-industry performance, weak economic growth and widespread cost-cutting.
Revenue was down from a year earlier at many institutions in the first half of 2012, including at J.P. Morgan and Citigroup, and many banks are setting aside less for salaries, bonuses and benefits.
For J.P. Morgan and Citigroup, the added challenge is to satisfy disgruntled investors without signaling a loss of faith in their heavily criticized CEOs, said compensation consultants who aren't involved in the discussions.
Mr. Dimon is expected to pay a price for trading losses that amounted to $5.8 billion through the end of the second quarter, but it isn't yet clear what form that will take. The board will consider a variety of factors when setting compensation, including the bank's performance and how Mr. Dimon handled the losses after they surfaced, said a person close to the process.
J.P. Morgan Chase already has initiated pay clawbacks for four former executives involved in the trading losses. One option for Mr. Dimon is that the cash portion of his bonus could drop, these people said. Last year, Mr. Dimon received a cash bonus of $4.5 million and a stock bonus of $17 million, plus $1.5 million in base salary.
Even though a final decision won't be made until the end of the year, J.P. Morgan board members already are discussing how they might change attitudes around bonuses if drastic adjustments are approved, said another person close to the board.
At the same time, some inside the bank don't want to be seen as overreacting to what the company views as a one-time event. Some executives argued that a series of management changes made in late July should have been delayed so that the moves wouldn't be perceived as a reaction to the trading losses, said people close to the bank. But Mr. Dimon said the announcement should be made as planned, these people added.
Dropping Mr. Dimon's cash bonus for 2012 "would make sense,'' said Mark Borges, a principal at compensation consultancy Compensia Inc.
But such a move may not pacify J.P. Morgan shareholders dissatisfied with how Mr. Dimon handled the crisis. To satisfy such critics, there isn't much directors can do "beyond docking a significant portion of his pay,'' Mr. Borges said.
The J.P. Morgan board's deliberations are the latest example of how the "London Whale" trading fiasco continues to ripple through the bank. Mr. Dimon initially played down worries about the trades as a "tempest in a teapot" but later said he was wrong. Losses from the bad bets could still climb above $7 billion, the bank said in July.
A board committee led by led by former Exxon Mobil Corp. Chief Executive Lee Raymond is conducting an internal investigation of the trading episode.
Mr. Raymond, who couldn't be reached for comment, is also chair of the board's compensation committee.
At Citigroup, Chairman Michael O'Neill has been meeting with large shareholders to understand their pay concerns and prepare for likely changes.
Investors are concerned less with the $14.9 million that Vikram Pandit, Citigroup's chief executive, was paid last year, than with the metrics used in setting compensation targets for senior management, said people familiar with the shareholder concerns.
Those targets were set by a board compensation committee. The panel used some qualitative methods for gauging performance, said the people familiar with the situation.
The most likely outcome is that Citigroup will tailor next year's plan to include more quantitative measures, these people said. Clawing back pay that already has been awarded isn't under consideration, they added.
Mr. Pandit received $1 in annual salary and no bonus in 2010. He said in February 2009 that he wouldn't accept a bonus until the bank returned to profitability.