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By Jason Simpkins
With a deadline looming for financial firms that received government bailout funds to submit their 2009 compensation plans to Treasury Department's pay czar, there's a possibility that Citigroup Inc. (NYSE: C) will lose the head of its secretive and extremely profitable energy trading arm.
The Wall Street Journal recently reported that Andrew J. Hall, head of Phibro LLC – Citigroup's energy trading unit – is pressing the company to honor a 2009 compensation package that could be worth as much as $100 million. Such a lofty payout would put Citi at odds with Kenneth Feinberg the Treasury Department's newly appointed pay czar.
Citigroup, which reported a net loss of $27.7 billion in 2008, received $34 billion in funding from the Troubled Asset Relief Program (TARP). That means Citi, along with six other financial firms, will have the compensation for its one hundred highest-paid paid employees reviewed by Feinberg.
"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives," said a Treasury Department official. "That process is just beginning now, and Mr. Feinberg has begun consulting with those firms about their compensation plans. 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 pay czar cannot force companies to break contracts with their employees, but he could ask those companies to reduce an employee's future pay to compensate for a single large payment or factor the amount of a contract into an employee's overall pay and use that calculation to bring down total compensation.
However, Hall's compensation will be particularly tricky. According to The Journal report he has long had a profit sharing contract with Citi entitling him to a sizeable portion of Phibro's gains. Hall's 2008 compensation totaled more than $100 million, people familiar with the matter told the paper. And while we're only halfway through 2009, Phibro is reportedly having a good year.
Also, until this year, Phibro's financial year ended in September. But now the firm's pay will be calculated to a full calendar year. That means Hall's pay period will run a full 15 months from September 2008 to December 2009.
According to The Journal report, Hall and others on his team earlier this year threatened to leave if their pay was cut to accommodate government mandates.
Hall's departure would be a huge blow to Citigroup's effort to return to profitability. The Phibro unit has at times accounted for the bulk of revenue at its parent company. Hall himself is credited with anticipating the sharp run up in crude oil prices and producing a healthy track record of large and profitable investment bets.
Citigroup does not report the details of Phibro's financial dealings. However, the company's annual report indicated that $667 million of Citigroup's 2008 revenue from "principal transactions" related to commodities was largely the result of Phibro's performance.
Regardless of Hall's contributions, the government says $100 million in compensation seems excessive.
"One could easily come to the conclusion that that's probably a bit out of whack on any pay scale," said White House Press Secretary Robert Gibbs. "The justification of setting outsized salaries is this notion of simply a series of unique skills or traits that can't be replicated by anybody on the planet. I don't know that the president would necessarily buy that notion."
News and Related Story Links:
- Wall Street Journal:
Citi in $100 Million Pay Clash
- Money Morning:
Citigroup and Bank of America Post Second-Quarter Profit but Will Likely Struggle in the Second Half