Is Citi's Pay Hike Justified?

June 24, 2009— -- As many of the country's employers slash salaries and lay off workers, Citigroup is apparently raising salaries for some workers, hoping to retain top talent.

The company said the salary increases are necessary to prevent valued employees from fleeing to other organizations and stressed that the change was not intended to increase employees' overall compensation but rather shift compensation packages that are based heavily on annual performance bonuses and tie them more directly to salaries.

Some rank-and-file workers reportedly could see base salaries rise as much as 50 percent to make up for shrinking bonuses. The mega-bank would also award millions of new stock options.

"Retaining and attracting the best talent is very important to the success of Citi and all its stakeholders," the company said in a statement this morning. "Citi continues to examine ways to ensure its employee compensation practices are competitive in this very challenging market environment. Any salary adjustments are not intended to increase to total annual compensation, rather, to adjust the balance between fixed and variable compensation."

Citi has received some $50 billion in funds from the government's Troubled Asset Relief Program. When asked about the Citi pay plan, an official with the Obama administration said that the White House was working aggressively to implement a law governing compensation at firms receiving taxpayer money.

But, the official added, "the president has been crystal clear that we are reluctant shareholders and are not going to be dragged into the day-to-day operations of private companies where the government has invested taxpayer money."

Kenneth Feinberg, the administration's recently appointed compensation "czar" has begun to review the compensation of top executives at the seven firms that have received the most government assistance, including Citi.

"We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance," the official said.

While the more than 6 million Americans who have lost their jobs since the start of the recession might find it hard to believe that already high-paid bankers might leave jobs that pay six or seven or even eight figures, bonus reductions enacted after the government's investment in Citi and other banks can have an impact.

Heidi Coppola, 51, who recently resigned from a position as a director for fixed income at Citi, said that while compensation concerns weren't her primary reason for leaving the bank, they played a role.

"I didn't leave because of the money, but in the back of my mind I knew this was a good time," she said. "I knew, with compensation affected … I wasn't really missing anything by staying at Citi, financially."

Coppola said that while at Citi she and her co-workers relied on their bonuses to help pay their living expenses. Reduced compensation could make up the minds of Citi employees who are already considering leaving the company, she said.

"People may not be leaving to go to other corporations," she said, but "they may be looking to try their hand at entrepreneurial endeavors."

Coppola's own endeavor is a business she co-founded, REO Clearinghouse. As REO's president, she's taken the experience and contacts she cultivated during her 20-plus years at Citi to help mortgage servicers and banks sell and donate foreclosed properties to community groups.

"I really felt that I could have a bigger impact working with more companies rather than just aligning myself with Citi," she said. "I saw that I could really make a difference in communities."

Chris Dodd Says Citi Doesn't 'Get It'

As the financial market crumbled in the last year, many have criticized Citi and other Wall Street firms for offering lavish salaries and even bigger bonuses that were not tied to risk. A worker might get a giant bonus for making a giant deal that three years down the road actually ended up costing the company millions of dollars.

Citi and other banks reined in some of those bonuses after taking billions in federal bailout dollars. But now they are faced with finding a way to financially incentivize their workers.

The Citi plan is not going over well with everybody.

"While I firmly believe that pay should be tied to performance, I find it difficult to see how the performance of hundreds of thousands of employees at a company that is surviving on government handouts could warrant a 50 percent pay raise," Rep. Elijah Cummings, D-Md., a member of the House Oversight Committee and Joint Economic Committee told ABC News. "This looks like a bonus by a new name, and I am disappointed that Citi would try to mislead the American people whose hard-earned tax dollars are keeping the company afloat.

"It is important for these banks to retain their top talent, but a good business should be able to do this without excessive bonuses, lavish retreats and 50 percent pay raises," Cummings added.

Sen. Chris Dodd, D-Conn., the chairman of the Senate Committee on Banking, Housing, and Urban Affairs, was more blunt.

"They just don't get it," was Dodd's entire statement about Citi.

Workers Want Commensurate Pay

Former Treasury Secretary Paul O'Neill, who spent more than a decade running aluminum giant Alcoa, said that employees' first concern is whether they are making the same salary as co-workers at the same level. The next test: is their salary roughly the same as comparable positions at other companies. The pay doesn't need to be exactly the same, but within about 5 percent of the competition, he said.

"Assuming that they were reasonably happy with what they were doing, they would not agree to move for less than a 20 percent increase in their prospective total comp," O'Neill said.

But as long as firms pay within the norm, O'Neill said that higher salaries -- especially the massive ones recently on Wall Street -- mean that companies get better results.

"I think it is not factually true that people work harder or smarter for more money," he said. "Everyone wants more money, but they don't necessarily deliver and return more work or harder work or smarter work."

O'Neill warned that if a government limit on compensation "creates a very large gap between the haves and have nots, people will move to the places that offer more money."

Steven Kaplan, a professor of entrepreneurship and finance at the University of Chicago's Booth School of Business, said that raising base salaries will be effective among rank-and-file employees, but not among higher-up executives.

"It's kind of ironic -- you raise salary but you're reducing pay for performance," he said. "What you'll see is that they'll end up changing salaries a lot year-to-year and these salary changes will effectively be bonuses."

Citi's decision is an "inevitable" reaction to government restrictions on executive compensation, he said. Such restrictions threaten the bank's ability to retain its best employees.

"It will be helpful, but in the end, Citigroup is in trouble," Kaplan said.

Citi, Bank of America Took Most Government Money

Although other banks, like Morgan Stanley and UBS have also opted to raise employee salaries, the repercussions of talent lost are felt the most by Citi and Bank of America, the two banks to have received the most government aid.

"Talented people in finance have a market, and that market pays very well for better or for worse -- and that's what you're seeing here," Kaplan said

Employees may be wooed by banks no longer under TARP limitations like Goldman Sachs or J.P. Morgan Chase, which have already repaid their government loans, or head to hedge funds and small investment boutiques that are not bound by any government restrictions.

The most effective way to keep employees, Kaplan said: get rid of the TARP.

"The bottom line is that compensation restrictions really run the risk of making Citi uncompetitive," he said.