Is $43m too much to pay the CEO of a bank the stock price of which has fallen 80%?

I wonder how the senior management at Citibank feel about Mike Mayo. I’m guessing they don’t like him much.

A kind reader has sent in some of the reports the CSLA banking analyst has been writing on their compensation. He isn’t much impressed with the amount that CEOs are paid at most US banks.

He notes that in the last decade their pay has almost doubled, “growing more quickly than revenue and profit”, and twice as fast as average employee compensation (CEOs’ pay packets are 100 times larger than the average employee’s).

He also points out that these pay packages do not appear to be correlated with any of the things a rational person might expect them to be linked to – namely ROE (return on equity), ROA (return on assets) or even stock performance.

But the bank that impresses Mayo least at the moment is Citibank. Along with Bank of America, it has had the highest CEO pay in the sector (we’re talking eight figures here) but the worst share price performance (down over 80%).

Even worse, it has learned nothing from its mistakes: in mid-May, the bank announced a new compensation plan that could at best be described as ‘excessive’. On Mayo’s estimates, it gives the CEO a “base case payment” of a whopping $43m. That’s a $10m stock grant, $7m of stock options and $26m from a profit sharing plan if Citigroup earns $46bn pre-tax over the next two years.

On the face of it, it looks like Citigroup has to be doing well for the CEO to rake in the mega bucks. But actually “the bar for incentive compensation is abnormally low”. For the deal to kick in, Citigroup only has to make $12bn (the CEO gets $6.7m then). But that really isn’t much – it is, for example, over one third less than Citi made in 2010 alone.

The plan also seems to encourage risk-taking. The CEO gets to take two-thirds of his stash in early 2013, and the rest in 2014 – ie he could be long gone and very, very rich (well richer, he pocketed $38m in 2008 and received $165m in 2007 for a hedge fund sale, says Mayo) by the time any problems show up.

Back in 2008 and 2009, the big banks indulged in all sorts of grand gestures over compensation (refusing bonuses and insisting on $1 salaries, for example). But as Mayo and the FT point out, it looks like the age of contrition is more than over. Average pay for the CEOs of the 15 biggest banks in the US and Europe jumped 36% last year to around $10m each, despite the fact that revenues across the board rose by less than 3% and profitability “varied widely” (seven of them actually managed to report lower profits in 2008 than 2009).

None of this is the kind of thing that makes much sense to ordinary people (me included). I wrote recently about why you should still be selling bank shares in the UK (too opaque, too risky) but the fact that compensation levels are both ludicrously high and badly designed in the US seems to me to be good enough reason to avoid having them as anything other than the odd trade too.