Bank Directors Take Demands For Dimon, Pandit Pay Cuts Seriously

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Uneasy lies the head that wears the crown. More so when the subjects want the crown shrunk in size. The subjects in question are the shareholders of JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C), who have forced the directors of the country’s largest banks to rethink the compensation handed out to their top brass this year – in particular the CEOs Jamie Dimon and Vikram Pandit. [1] While Dimon has been under pressure since JPMorgan’s multi-billion losses linked to the failed hedging portfolio was announced this May, investors are not too pleased with the qualitative aspects of Pandit’s and his deputies’ pay package. Clearly, the duo would rather accede to investor demands and accept one-time compensation slashes than step-down from their role like the CEOs of  competitor banks UBS (NYSE:UBS) and Barclays (NYSE:BCS) - Oswald Grübel and Bob Diamond – who were forced to do so when their banks faced a crisis recently.

See our full analysis of JPMorgan | Citigroup

Two Different Causes, But The Same Penalty Demanded

Since the global economic situation took a turn for the worse last year after showing signs of recovering from the recession of 2008, banks have been busy cutting costs to make up for the loss in revenues. Their cost cutting plans largely involved slashing jobs while setting aside lower cash for compensation across all levels.

And while investors have largely responded positively to these changes for most banks, the top management at Citigroup has not been so lucky. In a rather unprecedented event, the bank’s shareholders rejected the board’s compensation plan for this year proposed at their recent annual meeting. While the vote was non-binding, it certainly got the directors thinking about how best to appease the numerous shareholders who openly expressed their belief that Citigroup is overpaying its employees.

In JPMorgan’s case, the rationale behind investors seeking a pay cut for the top officials is different. There, the shareholders want the top management to be penalized for not being able to prevent the hedging loss which may still cost the bank a few billion dollars over and above the $5.8 billion reported until the end of Q2 2012. The investors are clearly not satisfied with the sweeping management changes Dimon proposed earlier.

But Do The Demands Really Make Sense?

Compensation expenses are by far the single biggest non-interest expense for a bank. To get things into perspective, JPMorgan spent $29 billion in compensations last year – a good 30% of the $97 billion it roped in as revenue. Similarly, Citigroup spent $25.7 billion as employee compensation last year; almost a third of its $78 billion in revenues. No wonder shareholders keep a close eye on the salaries drawn by employees – especially those higher up.

With revenues falling over the first half of the year, the ratio of compensation expenses to revenues has only gone higher, which is turn led to the increased pressure from investors for lower compensation to the top management. After all, the multi-million pay packages drawn by the executives would hardly be justified if the bank is not doing well – individually or in comparison to its peers.

What remains to be seen is how the directors react to these demands in coming months. They will really need to walk the tight rope to ensure that the shareholders are satisfied while at the same time keeping in mind that steep salary-cuts would trigger exits at the top level.

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Notes:
  1. Banks Rethink Executive Pay, The Wall Street Journal, Sept 9 2012 []
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