Citigroup CEO defends executive bonuses tied to compliance fixes

Citigroup executives on Thursday found themselves in a familiar spot: defending their decisions about where to spend money and why, and explaining how those moves would ultimately improve shareholder returns.

One year after leaders were hammered by analysts about how much it would cost to fix Citi’s latest risk management and internal control problems, new questions arose during the company’s third-quarter earnings call about a recently disclosed plan to pay bonuses to some of the top managers charged with fixing those shortcomings.

Analysts questioned why the new plan does not outline specific goals, why it is not part of existing incentive programs and whether the dollars should instead go toward share buybacks.

CEO Jane Fraser was quick to reiterate Citi’s stance that it will spend what it needs to spend to improve its risk management and control processes, which were called out a year ago by federal regulators who identified deficiencies in the system and slapped the $2.4 trillion-asset company with a $400 million civil money penalty.

To make sure the risk management overhaul succeeds, Citi needs to offer “carrots and sticks” in order to incentivize managers, retain them and hold them accountable, Fraser said.

“The main message here is there will be consequences if we fall short of what is expected,” Fraser told analysts. “I’m accountable. My team is accountable. And very simply we must and we will deliver.”

Announced in a regulatory filing in August, the bonus program would reward at least three senior leaders — Mark Mason, chief financial officer; Paco Ybarra, CEO of Citi’s institutional clients group; and Michael Whitaker, head of enterprise operations and technology — with up to $5 million in cash over three years for meeting certain performance metrics related to the risk management transformation.

It does not include Fraser, who took the reins as chief executive in March, but it could apply to additional unnamed senior leaders, Citi said. Payouts would be based on individual compensation levels.

It is somewhat unusual to see companies put incentive programs in place that are tied to satisfying regulatory concerns, said Shaun Bisman, a principal of Compensation Advisory Partners, an executive compensation consulting firm in New York City. In many cases, rewards would be built into a long-term incentive plan that could include “downward modifiers” for not meeting goals, Bisman said.

At the same time, “by developing a program that is clearly tied to the issues that company is facing, [Citi is] sending a strong message that this is important,” said Kelly Malafis, a partner at the same firm.

The bonus plan comes amid rising expenses at Citi, which is under pressure to narrow the gap with peers when it comes to shareholder returns. Citi’s third-quarter return on equity was 9.5%, trailing peers such as JPMorgan Chase and Bank of America, whose returns were 18% and 11.4%, respectively.

Year-to-date operating expenses at Citi totaled $33.7 billion, up 5% from the same nine-month period in 2020. Of the 5% increase, 3% has gone toward the risk management overhaul and 2% has been spent on investments in growth businesses like wealth management where Citi thinks it can achieve greater economies of scale.

The company continues to forecast a mid-single-digit range increase in full-year expenses. For the third quarter, operating costs rose to $11.5 billion, up 5% from $11 billion reported in the year-ago period.

Citi on Thursday did not provide expense estimates for next year.

Net income totaled $4.6 billion, an improvement of 48% from a year earlier due to lower credit costs. Revenues of $17.2 billion were down 1%, primarily because of a pretax loss of $680 million on the sale of Citi’s Australia consumer franchise to National Australia Bank.

Still, the company saw a 40% increase in stock trading.

During the quarter, Citi submitted plans to the Federal Reserve and the Office of the Comptroller of the Currency that outline how it is fixing its risk management and internal controls problems.

The company has now turned to executing those plans at the same time as it continues to undergo a business strategy revamp that involves exiting underperforming businesses and doubling down in growth areas. Following the retail exit from Australia, it is now “deep in the second round of bids” to sell consumer franchises in 12 other overseas markets, Fraser said.

So far this year, Citi has hired more than 500 bankers, advisors and other front-office workers in wealth management and 200 corporate and investment bankers around the world to support technology, health care, fintech and private-equity markets, the company said.

In the United States, digital deposits stand at $19 billion, up 26% year over year, reflecting the company’s ongoing focus on expanding its

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