Issue of the week: A rebellion over CEO salaries

It was “a shot across Wall Street’s bow,’’ said Francesco Guerrera in The Wall Street Journal. Last week, Citigroup shareholders rejected CEO Vikram Pandit’s $15 million pay package for 2011, arguing that the bank’s lackluster performance didn’t warrant such an outsize paycheck. It’s the first time a major bank has suffered a no vote on compensation. Though the vote is nonbinding—Pandit and other executives whose salaries were voted down aren’t obligated to return the cash and stock they have already received—it puts Wall Street executives on notice that their pay packages are under careful scrutiny. You can bet other CEOs are now feeling some anxiety about their companies’ next shareholder meeting.

The rebellion at Citi proves that the Dodd-Frank financial reforms are “beginning to have an effect,” said the Financial Times in an editorial. The business community tried desperately to kill off “say on pay” rules for public companies, and the rebuke of Pandit shows that CEOs “were right to be nervous.” Such votes carry enormous symbolic weight, said The Washington Post. No executive wants the bad PR that comes with a thumbs-down, and that should ensure that shareholders get a real seat at the table on compensation decisions in the future.

Perhaps, but don’t expect a downward trend in CEO pay, said Danielle Kurtzleben in USNews.com. Pandit’s problems have “more to do with Citi’s own shaky performance” than with general outrage over corporate pay packages. The bank’s stock is down more than 80 percent under Pandit’s leadership, and investors are fed up. That’s why Citigroup should have seen this coming, said Steven M. Davidoff in The New York Times. It knew that an influential proxy advisory firm had counseled Citi’s major investors to vote no; the bank “could have tried to bargain” to avoid this debacle. With the damage now done, the bank has two unattractive options: Rebuff the vote and open itself up to shareholder lawsuits, or force Pandit to take a major pay cut.

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Whatever the outcome, this is a step toward more responsible capitalism, said Michael Schuman in Time.com. Here are shareholders doing their “jobs as owners,” and enforcing the reasonable principle that “those who make bad choices and fail to perform” suffer the consequences. Investors should be careful not to take the lesson too far, or to insist on ever-higher profits. But Citi’s rebuff suggests that “perhaps the way to fix capitalism is to better empower the capitalists to fix themselves.”