Citigroup Inc. shareholders rejected its executive pay plan, afirst among the six largest U.S. banks, amid criticism it letsChief Executive Officer Vikram Pandit collect millions of dollarsin rewards too easily.

About 45 percent of the votes favored the plan, which Citigrouphad said will attract and retain top talent, according to apreliminary tally at the New York-based firm's annual meeting inDallas yesterday. While the vote isn't binding, outgoing ChairmanRichard Parsons said changes will be made.

“That's a serious matter,” Parsons said during his finalCitigroup shareholders' meeting as chairman. The board will seek amore quantitative, formula-based method for setting top executives'pay, he said in a subsequent interview. “We're going to have somemore conversation with our shareholders, make sure we understandtheir concerns and then fix it,” he said.

The rejection is a rarity for companies in the U.S., whichtemporarily imposed pay curbs on financial firms as part of theindustry's $700 billion taxpayer bailout in 2008. While new rulesrequire “say-on-pay” votes, only 41 firms in the Russell 3000 Indexfailed last year to win a majority for executive pay plans,according to Ted Allen, a spokesman for ISS Proxy AdvisoryServices. Just three have been rejected this year, none of them atbanks, Allen said.

The vote is another blow for Pandit, following last month'srejection by U.S. regulators of his capital plan that includedrewards for shareholders, possibly including a higher dividend.Directors had awarded Pandit, 55, about $15 million in totalcompensation for 2011 and also granted him a separate, multi-yearretention package that may be worth $40 million. Citigroup sharesslumped 44 percent last year.

“Many investors have mentioned to me that they feel theincentive compensation at Citigroup is ludicrous, that there's anartificially low hurdle,” said Mike Mayo, an analyst at CLSA in NewYork, who rates the bank's shares “underperform.” “Are you going togive the manager of the New York Yankees an incentive bonus if hewins one-third of his games?”

Pandit's proposed payout included a $5.33 million cash bonus,more than the $3 million cash bonus that Goldman Sachs Group Inc.directors awarded to CEO Lloyd Blankfein for 2011. Morgan Stanleydirectors didn't give one to CEO James Gorman.

Parsons was a member of the board's personnel and compensationcommittee that decided on awards for Pandit and other executives,according to a filing. The board didn't award Pandit too muchmoney, he said.

Communication 'Breakdown'

“No, I don't think it's really about that,” he said in aninterview as he walked through the Hilton Anatole hotel after themeeting. “We think that there was a breakdown in terms ofcommunication in terms of how our shareholders understood it,looked at it.”

Former Alcoa Inc. CEO Alain Belda led the committee before heand Parsons retired from the board yesterday, an annual filingshows. Other members included new Citigroup Chairman MichaelO'Neill, William Thompson Jr. and Diana Taylor. Taylor is thecompanion of New York City Mayor Michael Bloomberg, the founder andmajority owner of Bloomberg News parent Bloomberg LP.

Citigroup accepted $45 billion from U.S. taxpayers to help itsurvive the financial crisis. The firm has since repaid the entiresum. Banks that took money from the Treasury Department's TroubledAsset Relief Program in 2008 and 2009 were required to put asay-on-pay vote before shareholders, said Eleanor Bloxham, CEO ofthe Value Alliance Co., a board advisory firm in Westerville, Ohio.The Dodd-Frank Act, passed in 2010, requires such votes for allcompanies, she said.

The only large bank to have a compensation plan rejected byshareholders was Cleveland-based KeyCorp in 2010, she said.According to KeyCorp's 2011 shareholder letter, the companysubsequently reduced pay for then-CEO Henry L. Meyer III to $4.5million from $5 million.

ISS and its competitor, Glass Lewis & Co., faulted Pandit'spayouts and recommended that investors reject the bank's executivecompensation plan for 2011. Pandit got more than Stuart Gulliver,CEO of HSBC Holdings Plc, the London-based lender that made moremoney than Citigroup in 2011 and posted a smaller share drop.

“Pandit's 2011 incentive pay and multiple retention awards aresubstantially discretionary in nature or lack rigorous goals toincentivize improvement in shareholder value,” analysts for ISS, aunit of MSCI Inc., wrote in their report.

'Short Memories'

The vote also may affect payouts for other Citigroup executives.Chief Operating Officer John Havens received about $13 million for2011, including a $5 million cash bonus. He oversees the securitiesand banking division, which posted a 24 percent slump in revenuelast year.

Manuel Medina-Mora, consumer-banking chief, received about $11.4million, including a $4.2 million cash bonus. Profit at theconsumer-banking unit jumped 33 percent to $6.2 billion in 2011,compared with the prior year.

“Bankers historically have very short memories and we continueto see examples of banks fighting to get back to the moretraditional ways of banking pre-crisis, including outsizedcompensation,” said Todd Hagerman, an analyst at Sterne Agee &Leach Inc. who has a “buy” rating on Citigroup shares. “It's simplyamazing how many bankers fail to recognize the profound structuralchanges taking place in the industry.”

More than 150 people attended the annual meeting in addition tothe board members and senior executives. All other managementproposals passed with more than 80 percent of votes cast, includingthe election of directors, according to Citigroup Secretary MichaelHelfer.

Parsons, 64, joined the Citigroup board in 1996 and helped itbecome the world's biggest bank, before it almost collapsed in2008. He became chairman in 2009 and presided over repayment of thecompany's U.S. bailout. His replacement, O'Neill, 65, takes over inthe wake of the Fed's rejection of the bank's capital plan.

The Fed didn't accept Citigroup's proposal after finding itwould cause the company's capital levels to fall below minimumstandards in a dire economic scenario. Pandit affirmed yesterdaythat the lender may wait until it submits a 2013 plan to the Fedbefore seeking approval to boost the 1-cent quarterly payout orrepurchase shares.

“Creating shareholder value and also making sure that'sreflected in our book value is our No. 1 goal,” Pandit saidyesterday. Returning some of that value is a priority, he said,whether it's a dividend or a share buyback.

Parsons is leaving a board he described at the meeting as thebest of any financial firm. Shareholders should be “pleased andgrateful” for the directors they have, he said.

“We leave confident that the place is in pretty good shape andin pretty good hands,” he said, as he left the hotel through a rearexit.

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