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INCENTIVE PLANS
12 Months Ended
Dec. 31, 2013
INCENTIVE PLANS  
INCENTIVE PLANS

7.      INCENTIVE PLANS

 

Overview

 

The Company makes restricted or deferred stock and/or deferred cash awards, as well as stock payments, as part of its discretionary annual incentive award program involving a large segment of Citigroup’s employees worldwide.

 

Stock awards, deferred cash awards and grants of stock options also may be made at various times during the year as sign-on awards to induce new hires to join the Company or to high-potential employees as long-term retention awards.

 

Consistent with long-standing practice, a portion of annual compensation for non-employee directors also is delivered in the form of equity awards.

 

Other incentive awards are made on an annual or other regular basis pursuant to programs designed to retain and motivate certain employees who do not participate in Citigroup’s annual discretionary incentive award program.

 

Recipients of Citigroup stock awards generally do not have any stockholder rights until shares are delivered upon vesting or exercise, or after the expiration of applicable required holding periods. Recipients of restricted or deferred stock awards, however, may be entitled to receive dividends or dividend-equivalent payments during the vesting period. Recipients of restricted stock awards generally are entitled to vote the shares in their award during the vesting period. Once a stock award vests, the shares are freely transferable, unless they are subject to a restriction on sale or transfer for a specified period. Pursuant to a stock ownership commitment, certain executives have committed to holding most of their vested shares indefinitely.

 

All equity awards granted since April 19, 2005 have been made pursuant to stockholder-approved stock incentive plans that are administered by the Personnel and Compensation Committee of the Citigroup Board of Directors (the Committee), which is composed entirely of independent non-employee directors.

 

At December 31, 2013, approximately 68.4 million shares of Citigroup common stock were authorized and available for grant under Citigroup’s 2009 Stock Incentive Plan, the only plan from which equity awards are currently granted.

 

The 2009 Stock Incentive Plan and predecessor plans permit the use of treasury stock or newly issued shares in connection with awards granted under the plans. Newly issued shares were issued to settle the vesting of annual deferred stock awards in January 2011, 2012, 2013 and 2014. The newly issued shares in January 2011 were specifically intended to increase the Company’s equity capital. The use of treasury stock or newly issued shares to settle stock awards does not affect the amortization recorded in the Consolidated Income Statement for equity awards.

 

The following table shows components of compensation expense relating to the Company’s stock-based compensation programs and deferred cash award programs as recorded during 2013, 2012 and 2011:

 

In millions of dollars

 

2013

 

2012

 

2011

 

Charges for estimated awards to retirement-eligible employees

 

$

468

 

$

444

 

$

338

 

Option expense

 

10

 

99

 

161

 

Amortization of deferred cash awards, deferred cash stock units and performance stock units

 

230

 

198

 

208

 

Immediately vested stock award expense (1)

 

54

 

60

 

52

 

Amortization of restricted and deferred stock awards (2)

 

862

 

864

 

871

 

Total

 

$

1,624

 

$

1,665

 

$

1,630

 

 


(1)         Represents expense for immediately vested stock awards that generally were stock payments in lieu of cash compensation. The expense is generally accrued as cash incentive compensation in the year prior to grant.

(2)         All periods include amortization expense for all unvested awards to non-retirement-eligible employees. Amortization is recognized net of estimated forfeitures of awards.

 

Annual Incentive Awards

 

Most of the shares of common stock issued by Citigroup as part of its equity compensation programs are to settle the vesting of restricted and deferred stock awards granted as part of discretionary annual incentive awards. These annual incentive awards generally also include immediate cash bonus payments and deferred cash awards and, in the European Union (EU), immediately vested stock payments.

 

Discretionary annual incentives generally are awarded in the first quarter of the year based upon the previous year’s performance. Awards valued at less than U.S. $100,000 (or the local currency equivalent) generally are paid entirely in the form of an immediate cash bonus. Pursuant to Citigroup policy and/or regulatory requirements, employees and officers with higher incentive award values are subject to mandatory deferrals of incentive pay and generally receive 25%-60% of their award in a combination of restricted or deferred stock and deferred cash awards. Certain employees are subject to reduced deferral requirements that apply to awards valued at less than U.S. $100,000 (or local currency equivalent). Discretionary annual incentive awards made to many employees in the EU are subject to deferral requirements between 40%-60%, regardless of the total award value, with 50% of the immediate incentive delivered in the form of a stock payment subject to a restriction on sale or transfer (generally, for six months).

 

Deferred annual incentive awards generally are delivered as two awards—a restricted or deferred stock award under the Company’s Capital Accumulation Program (CAP) and a deferred cash award. The applicable mix of CAP and deferred cash awards may vary based on the employee’s minimum deferral requirement and the country of employment. In some cases, the entire deferral will be in the form of either a CAP or deferred cash award.

 

Subject to certain exceptions (principally, for retirement-eligible employees), continuous employment within Citigroup is required to vest in CAP and deferred cash awards. Post-employment vesting by retirement-eligible employees and participants who meet other conditions generally is conditioned upon their refraining from competition with Citigroup during the remaining vesting period, unless the employment relationship has been terminated by Citigroup under certain conditions.

 

Generally, the CAP and deferred cash awards vest in equal annual installments over three- or four-year periods. Vested CAP awards are delivered in shares of common stock. Dividend equivalent payments are paid to participants during the vesting period or accrued for participants who have a CAP award subject to the performance-vesting conditions described below. Deferred cash awards are payable in cash and earn a fixed notional rate of interest that is paid only if and when the underlying principal award amount vests. Generally, in the EU, vested CAP shares are subject to a restriction on sale or transfer after vesting, and vested deferred cash awards are subject to hold-back (generally, for six months in each case).

 

Unvested CAP and deferred cash awards made in January 2011 or later are subject to one or more clawback provisions that apply in certain circumstances, including in the case of employee risk-limit violations or other misconduct or where the awards were based on earnings that were misstated. Deferred cash awards made to certain employees in February 2013 and later are subject to a discretionary performance-based vesting condition under which an amount otherwise scheduled to vest may be reduced in the event of a “material adverse outcome” for which a participant has “significant responsibility.”  Deferred cash awards made to these employees in February 2014 are subject to an additional clawback provision pursuant to which unvested awards may be canceled if the employee engaged in misconduct or exercised materially imprudent judgment, or who failed to supervise or escalate the behavior of other employees who did.

 

CAP awards made to certain employees in February 2013 and later and deferred cash awards made to certain employees in January 2012 are subject to a formulaic performance-based vesting condition pursuant to which amounts otherwise scheduled to vest will be reduced based on the amount of any pretax loss by a participant’s business in the calendar year preceding the scheduled vesting date. For CAP awards made in February 2013 and later, a minimum reduction of 20% applies for the first dollar of loss.

 

The annual incentive award structure and terms and conditions described above apply generally to awards made in 2011 and later, except where indicated otherwise. Annual incentive awards in January 2009 and 2010 of U.S. $100,000 or more (or local currency equivalent) were generally subject to deferral requirements between 25%-40%. In 2010, because an insufficient number of shares were available for grant under the 2009 Stock Incentive Plan, an alternative award structure was applied, primarily for deferrals of incentive awards in the U.S. and U.K. Under this structure, portions of the amounts that normally would have been deferred in the form of CAP awards were instead awarded as two types of deferred cash awards—one subject to a four-year vesting schedule and earning a LIBOR-based return, and the other subject to a two-year vesting schedule and denominated in stock units, the value of which fluctuated based on the price of Citigroup common stock. Other terms and conditions of these awards were the same as the CAP awards granted in 2010. In 2009, some deferrals also were made in the form of a deferred cash award subject to a four-year vesting schedule and earning a LIBOR-based return, in addition to a CAP award.

 

Prior to 2009, a mandatory deferral requirement of at least 25% applied to incentive awards valued at $20,000 or more. Deferrals were in the form of CAP awards. In some cases, participants were entitled to elect to receive stock options in lieu of some or all of the value that otherwise would have been awarded as restricted or deferred stock. CAP awards granted prior to 2011 were not subject to clawback provisions or performance criteria.

 

Except for awards subject to variable accounting (as described below), the total expense recognized for stock awards represents the grant date fair value of such awards, which is generally recognized as a charge to income ratably over the vesting period, except for awards to retirement-eligible employees and stock payments (e.g., immediately vested awards). Whenever awards are made or are expected to be made to retirement-eligible employees, the charge to income is accelerated based on when the applicable conditions to retirement eligibility are or will be met. If the employee is retirement eligible on the grant date, the entire expense is recognized in the year prior to grant.  For immediately vested stock payments, the charge to income is recognized in the year prior to grant. For employees who become retirement eligible during the vesting period, expense is recognized from the grant date until eligibility conditions are met.

 

Expense for immediately vested stock awards that generally are made in lieu of cash compensation also is recognized in the year prior to grant in accordance with U.S. GAAP.

 

Annual incentive awards made in January 2011 and January 2010 to certain executive officers and other highly compensated employees were administered in accordance with the Emergency Economic Stabilization Act of 2008, as amended (EESA), pursuant to structures approved by the Special Master for TARP Executive Compensation (Special Master).  These structures included stock awards subject to vesting requirements over periods of up to three years and/or sale restrictions. Certain of these awards are subject to discretionary performance-based vesting conditions. These awards, and CAP awards to participants in the EU that are subject to certain discretionary clawback provisions, are subject to variable accounting, pursuant to which the associated charges fluctuate with changes in Citigroup’s common stock price over the applicable vesting periods. For these awards, the total amount that will be recognized as expense cannot be determined in full until the awards vest. For stock awards subject to discretionary performance conditions, compensation expense was accrued based on Citigroup’s common stock price at the end of the reporting period and on the estimated outcome of meeting the performance conditions.

 

In January 2009, certain senior executives received 30% of their annual incentive awards as performance-vesting equity awards conditioned primarily on stock-price performance. Because the price targets were not met, only a fraction of the awards vested. The fraction of awarded shares that vested was determined based on a ratio of the price of Citigroup’s common stock on January 14, 2013 (the award termination date) to the award’s price targets of $106.10 and $178.50. None of the shares awarded or vested were entitled to any payment or accrual of dividend equivalents. The grant-date fair value of the awards was recognized as compensation expense ratably over the vesting period.

 

This fair value was determined using the following assumptions:

 

Weighted-average per-share fair value

 

$

22.97

 

Weighted-average expected life

 

3.85 years

 

Valuation assumptions

 

 

 

Expected volatility

 

36.07

%

Risk-free interest rate

 

1.21

%

Expected dividend yield

 

0.88

%

 

Sign-on and Long-Term Awards

 

As referenced above, from time to time, restricted or deferred stock awards and/or stock option grants are made outside of Citigroup’s annual incentive programs to induce employees to join Citigroup or as special retention awards to key employees. Vesting periods vary, but generally are two to four years. Generally, recipients must remain employed through the vesting dates to vest in the awards, except in cases of death, disability or involuntary termination other than for “gross misconduct.” Unlike CAP awards, these awards do not usually provide for post-employment vesting by retirement-eligible participants. If these stock awards are subject to certain clawback provisions or performance conditions, they may be subject to variable accounting.

 

Deferred cash awards often are granted to induce new hires to join the Company and usually are intended to replace deferred incentives awarded by prior employers that were forfeited when the employees joined Citigroup. As such, the vesting schedules and terms and conditions of these awards generally are structured to match the vesting schedules and terms and conditions of the forfeited awards. The expense recognized in 2013 and 2012 for these awards was $93 million and $147 million, respectively.

 

A retention award of deferred stock to then-CEO Vikram Pandit was made on May 17, 2011, and was scheduled to vest in three equal installments on December 31, 2013, 2014 and 2015. The award was cancelled in its entirety when Mr. Pandit resigned in October 2012. Because of discretionary performance vesting conditions, the award was subject to variable accounting until its cancellation in the fourth quarter of 2012.

 

Director Compensation

 

Non-employee directors receive part of their compensation in the form of deferred stock awards that vest in two years and may elect to receive part of their retainer in the form of a stock payment, which they may elect to defer.

 

A summary of the status of Citigroup’s unvested stock awards that are not subject to variable accounting at December 31, 2013, and changes during the 12 months ended December 31, 2013, are presented below:

 

Unvested stock awards

 

Shares

 

Weighted-
average grant
date fair
value per share

 

Unvested at January 1, 2013

 

63,976,925

 

$

37.62

 

New awards

 

19,619,715

 

43.96

 

Cancelled awards

 

(2,007,674

)

35.89

 

Vested awards (1)

 

(26,438,206

)

38.83

 

Unvested at December 31, 2013

 

55,150,760

 

$

39.37

 

 


(1)        The weighted-average fair value of the vestings during 2013 was approximately $41.89 per share.

 

A summary of the status of Citigroup’s unvested stock awards that are subject to variable accounting at December 31, 2013, and changes during the 12 months ended December 31, 2013, are presented below:

 

 

Unvested stock awards

 

Shares

 

Weighted-
average award
issuance fair
value per share

 

Unvested at January 1, 2013

 

5,964,224

 

$

42.50

 

New awards

 

1,975,174

 

43.94

 

Cancelled awards

 

(65,409

)

47.71

 

Vested awards (1)

 

(1,887,967

)

42.52

 

Unvested at December 31, 2013

 

5,986,022

 

$

42.91

 

 


(1)         The weighted-average fair value of the vestings during 2013 was approximately $41.41 per share.

 

At December 31, 2013, there was $694 million of total unrecognized compensation cost related to unvested stock awards, net of the forfeiture provision. That cost is expected to be recognized over a weighted-average period of 1.9 years. However, the cost of awards subject to variable accounting will fluctuate with changes in Citigroup’s common stock price.

 

Stock Option Programs

 

Beginning in 2009, directors were no longer able to elect to receive any of their compensation in the form of stock options, and the Company no longer grants stock options to employees as part of its annual incentive award programs (this last occurred when certain CAP participants were permitted to elect to receive stock options in lieu of restricted or deferred awards made in 2009).  Citigroup still grants stock options to employees on occasion, as sign-on awards or as retention awards, as referenced above. All stock options are granted on Citigroup common stock with exercise prices that are no less than the fair market value at the time of grant. Vesting periods and other terms and conditions of sign-on and retention option grants tend to vary by grant.

 

On February 14, 2011, Citigroup granted options exercisable for approximately 2.9 million shares of Citigroup common stock to certain of its executive officers. The options have six-year terms and vest in three equal annual installments beginning on February 14, 2012. The exercise price of the options is $49.10, which was the closing price of a share of Citigroup common stock on the grant date. On any exercise of the options before the fifth anniversary of the grant date, the shares received on exercise (net of the amount required to pay taxes and the exercise price) are subject to a one-year transfer restriction.

 

On April 20, 2010, Citigroup made an option grant to a group of employees who were not eligible for the October 29, 2009 broad-based grant described below. The options were awarded with an exercise price equal to the NYSE closing price of a share of Citigroup common stock on the trading day immediately preceding the date of grant ($48.80). The options vested in three annual installments beginning on October 29, 2010. The options have a six-year term.

 

On October 29, 2009, Citigroup made a broad-based option grant to employees worldwide. The options have a six-year term, and generally vested in three equal installments over three years, beginning on the first anniversary of the grant date. The options were awarded with an exercise price equal to the NYSE closing price on the trading day immediately preceding the date of grant ($40.80). The CEO and other employees whose 2009 compensation was subject to structures approved by the Special Master did not participate in this grant.

 

In January 2009, members of Citigroup’s Management Executive Committee received 10% of their awards as performance-based stock options, with an exercise price that placed the awards significantly “out of the money” on the date of grant. Half of each executive’s options has an exercise price of $178.50 and half has an exercise price of $106.10. The options were granted on a day on which the NYSE closing price of a share of Citigroup common stock was $45.30. The options have a 10-year term and vested ratably over a four-year period.

 

Generally, all other options granted from 2003 through 2009 have six-year terms and vested ratably over three- or four-year periods; however, options granted to directors provided for cliff vesting. All outstanding options granted prior to 2009 are significantly “out of the money”.

 

Prior to 2003, Citigroup options had 10-year terms and generally vested at a rate of 20% per year over five years (with the first vesting date occurring 12 to 18 months following the grant date). All outstanding options that were granted prior to 2003 expired in 2012.

 

From 1997 to 2002, a broad base of employees participated in annual option grant programs. The options vested over five-year periods, or cliff vested after five years, and had 10-year terms but no reload features. No grants have been made under these programs since 2002 and all options that remained outstanding expired in 2012.

 

All unvested options granted to former CEO Vikram Pandit, including premium-priced stock options granted on May 17, 2011, were canceled upon his resignation in October 2012.

 

Information with respect to stock option activity under Citigroup stock option programs for the years ended December 31, 2013, 2012 and 2011 is as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

Options

 

Weighted-
average
exercise
price

 

Intrinsic
value
per share

 

Options

 

Weighted-
average
exercise
price

 

Intrinsic
value
per share

 

Options

 

Weighted-
average
exercise
price

 

Intrinsic
value
per share

 

Outstanding, beginning of period

 

35,020,397

 

$

51.20

 

$

 

37,596,029

 

$

69.60

 

$

 

37,486,011

 

$

93.70

 

$

 

Granted—original

 

 

 

 

 

 

 

3,425,000

 

48.86

 

 

Forfeited or exchanged

 

(50,914

)

212.35

 

 

(858,906

)

83.84

 

 

(1,539,227

)

176.41

 

 

Expired

 

(86,964

)

528.40

 

 

(1,716,726

)

438.14

 

 

(1,610,450

)

487.24

 

 

Exercised

 

(3,374,413

)

40.81

 

9.54

 

 

 

 

(165,305

)

40.80

 

6.72

 

Outstanding, end of period

 

31,508,106

 

$

50.72

 

$

1.39

 

35,020,397

 

$

51.20

 

$

 

37,596,029

 

$

69.60

 

$

 

Exercisable, end of period

 

30,662,588

 

 

 

 

 

32,973,444

 

 

 

 

 

23,237,069

 

 

 

 

 

 

The following table summarizes information about stock options outstanding under Citigroup stock option programs at December 31, 2013:

 

 

 

 

 

Options outstanding

 

Options exercisable

 

Range of exercise prices

 

Number
outstanding

 

Weighted-average
contractual life
remaining

 

Weighted-average
exercise price

 

Number
exercisable

 

Weighted-average
exercise price

 

$29.70—$49.99 (1)

 

30,009,552

 

2.1 years

 

$

42.57

 

29,164,034

 

$

42.39

 

$50.00—$99.99

 

69,956

 

7.1 years

 

56.76

 

69,956

 

56.76

 

$100.00—$199.99

 

516,531

 

4.9 years

 

147.33

 

516,531

 

147.33

 

$200.00—$299.99

 

712,067

 

0.8 years

 

243.80

 

712,067

 

243.80

 

$300.00—$399.99

 

200,000

 

4.1 years

 

335.50

 

200,000

 

335.50

 

Total at December 31, 2013

 

31,508,106

 

2.1 years

 

$

50.73

 

30,662,588

 

$

50.78

 

 


(1)        A significant portion of the outstanding options are in the $40 to $45 range of exercise prices.

 

As of December 31, 2013, there was $0.6 million of total unrecognized compensation cost related to stock options; this cost is expected to be recognized over a weighted-average period of 0.1 years. Valuations and related assumptions for Citigroup option programs are presented below. Citigroup uses a lattice-type model to value stock options.

 

For options granted during

 

2013

 

2012

 

2011

 

Weighted-average per-share fair value, at December 31

 

N/A

 

N/A

 

$

13.90

 

Weighted-average expected life

 

 

 

 

 

 

 

Original grants

 

N/A

 

N/A

 

4.95 yrs.

 

Valuation assumptions

 

 

 

 

 

 

 

Expected volatility

 

N/A

 

N/A

 

35.64

%

Risk-free interest rate

 

N/A

 

N/A

 

2.33

%

Expected dividend yield

 

N/A

 

N/A

 

 

Expected annual forfeitures

 

 

 

 

 

 

 

Original and reload grants

 

N/A

 

N/A

 

9.62

%

 

N/A Not applicable

 

Profit Sharing Plan

 

In October 2010, the Committee approved awards under the 2010 Key Employee Profit Sharing Plan (KEPSP), which entitled participants to profit-sharing payments based on an initial performance measurement period of January 1, 2010 through December 31, 2012. Generally, if a participant remains employed and all other conditions to vesting and payment are satisfied, the participant would be entitled to an initial payment in 2013, as well as a holdback payment in 2014 that would be reduced based on performance during the subsequent holdback period (generally, January 1, 2013 through December 31, 2013). Because the vesting and performance conditions were satisfied, the participant’s initial payment equaled two-thirds of the product of the cumulative pretax income of Citicorp (as defined in the KEPSP) for the initial performance period and the participant’s applicable percentage. The initial payments were paid in 2013 and were paid in cash, except for U.K. participants who received 50% of their payment in Citigroup common stock that was subject to a six-month sale restriction.

 

Participants who satisfied the vesting and performance conditions for the KEPSP holdback payment were entitled to such payment equal to the product of (i) the lesser of cumulative pretax income of Citicorp for the initial performance period and cumulative pretax income of Citicorp for the initial performance period and the holdback period combined (generally, January 1, 2010 through December 31, 2013), and (ii) the participant’s applicable percentage, less the initial payment. The holdback payment will be paid after January 20, 2014 but no later than March 15, 2014. The holdback payment will be credited with notional interest during the holdback period. The holdback payment will be paid in cash; however, a portion of the awards will be paid in Citigroup common stock if required by regulatory authority. Regulators required that U.K. participants receive at least 50% of their initial payment and at least 50% of their holdback payment, if any, in shares of Citigroup common stock that will be subject to a six-month sale restriction. Clawbacks apply to the award.

 

Independent risk function employees were not eligible to participate in the KEPSP, as the independent risk function participates in the determination of whether payouts will be made under the KEPSP. Instead, key employees in the independent risk function were eligible to receive deferred cash retention awards, which vest two-thirds on January 20, 2013 and one-third on January 20, 2014. The deferred cash awards incentivize key risk employees to contribute to the Company’s long-term profitability by ensuring that the Company’s risk profile is properly aligned with its long-term strategies, objectives and risk appetite, thereby aligning the employees’ interests with those of Company shareholders.

 

On February 14, 2011, the Committee approved grants of awards under the 2011 KEPSP to certain executive officers, and on May 17, 2011 to the then-CEO Vikram Pandit. These awards had a performance period of January 1, 2011 to December 31, 2012 and other terms of the awards are similar to the 2010 KEPSP. The KEPSP award granted to Mr. Pandit was cancelled upon his resignation in October 2012.

 

Expense recognized in 2013 and 2012 in respect of the KEPSP was $78 million and $246 million, respectively.

 

Performance Share Units

 

Certain executive officers were awarded a target number of performance share units (PSUs) on February 19, 2013 for performance in 2012, and to a broader group of executives on February 18, 2014, for performance in 2013. PSUs will be earned only to the extent that Citigroup attains specified performance goals relating to Citigroup’s return on assets and relative total shareholder return against peers over the three-year period beginning with the year of award. The actual number of PSUs ultimately earned could vary from zero, if performance goals are not met, to as much as 150% of target, if performance goals are meaningfully exceeded. The value of each PSU is equal to the value of one share of Citi common stock. The value of the award will fluctuate with changes in Citigroup’s share price and the attainment of the specified performance goals for each award, until it is settled solely in cash after the end of the performance period.

 

Variable Incentive Compensation

 

Citigroup has various incentive plans globally that are used to motivate and reward performance primarily in the areas of sales, operational excellence and customer satisfaction. These programs are reviewed on a periodic basis to ensure that they are structured appropriately, aligned to shareholder interests and adequately risk balanced. For the years ended December 31, 2013, 2012 and 2011, Citigroup expensed $1.1 billion, $670 million and $1.0 billion, respectively, for these plans globally.