Bailout

Why Citi?s right to raise salaries

By Felix Salmon

John Carney is underwhelmed by the news that Citi is raising its base salaries:

Let’s break this down in the simplest terms: this is a disaster. Without taxpayer guarantees and funding, Citigroup would be unable to give its employees higher base salaries. The best employees would leave for other firms. This market process would further diminish Citi and enhance its better managed competitors. Everyone, except Citi shareholders and some of its senior management, would be better off. Instead, taxpayer funds are being used to block this market process, trapping talent inside a failed firm and rewarding management’s worst mistakes.

The problem with this argument is that without taxpayer guarantees and funding, Citigroup would be unable to give its employees any base salaries at all, or bonuses, or anything but a pink slip. Citi is too big to fail, which means the US government has to support it. At the same time, the stated aim of the Obama administration is to be as hands-off as possible when it comes to its ownership stake in banks — something which Carney in general supports. (I’m sure he wouldn’t want the government interfering with loan decisions, for instance.)

If you’re going to leave Citigroup’s senior management to run the company, you have to let them decide on things like the proper ratio of bonuses to base salaries. And since that ratio was obviously far too high in the past, it has to come down substantially. And a sensible way of bringing that ratio down is to raise base salaries (and, of course, reduce bonuses as well).

There’s no reason why Citigroup can’t take the lead in rationalizing its compensation structure. If part of that rationalization involves raising base salaries, fine. Resorting to “if it wasn’t for us taxpayers you wouldn’t exist at all” is unhelpful.

Full post as published by Macroprudential on June 24, 2009 (boomark / email).