Do you pay or do they go?

Posted by Marc Hodak on April 28, 2009 under Executive compensation, Invisible trade-offs | Be the First to Comment

It had to come to this.  After months of bonus baiting, with everyone asking “where else could they go?”  After Andrew Cuomo invited every banker unfortunate enough to find himself in the Journal or Times into his office to ask why they made so much money.  After the press smacked Geithner around like a pinata.  We’re finally at the moment when it all comes down to taking responsibility for a choice:

Citigroup Inc., soon to be one-third owned by the U.S. government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter.

We’re talking tens of millions for certain people.  Choose your outraged retort:

How can anyone be worth that much?  Surely they don’t need the money.

How can they be so greedy?  This is just extortion!

Why should taxpayers be paying bonuses for failure?

Why should people need incentives to do their job?

Now that you’ve gotten it out of your system, put yourself in Geithner’s shoes.  Phibro generates a huge amount of profit for the Citibank.  It’s not the machines.  It’s not the building or furnishings.  It’s not the computers.  It’s the people.  The people create the profit.  As with anything else, it’s most likely that 20% of the people create 80% of the profit.  If you don’t pay the key 20%, they walk.  You lose 80% of the profit.  So, we can enjoy our two minute hate, the clever rants about evil bankers, and emotional complaints about how bankers are no more special than the “working man.”  Then someone has to decide what to do about bonuses.

I think the right answer may be to spin off the unit; Citibank is unwieldy and inherently unprofitable.  They need to get leaner.  They need to undo the failed “financial supermarket” strategy that got them here if there is any chance of creating a profitable remnant.  That, or pay enough to keep the best.

But that’s the economic decision.  That’s what a conscientious board mindful of their fiduciary responsibilities would likely decide.  Congress is a different kind of board.  What would you do?