So your employer owes you $100M….

By: ispeculatornew
Date posted: 07.26.2009 (5:00 am) | Write a Comment  (6 Comments)

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hallCertainly an interesting debate and one that I have discussed in the past. Compensation discussions are too often simplified and things are often a lot more complex than could be thought initially.  The man on the left,  Andrew J. Hall, heads Citigroup’s energy-trading unit, Phibro LLC. There is currently a major discussion between him and the now government ran Citigroup. It’s easy to imagine Citigroup’s argument. They say that giving him $100 millions will draw a lot of public attention and bring back a lot of debates similar to what was said about AIG compensation and they do of course have a point. Signing a bonus check for $100 millions could easily make headlines and put Barack Obama and other public officials in hot water.

Sure Mr. Hall needs the money to help maintain his 1000 year-old castle in Germany as well as his impressive art collection. But somehow, I can’t imagine that would draw very much public sympathy. The problem of course is that all of this is very short sighted.

The government, and thus by default the US population, is now the #1 shareholder of Citibank. If Citibank can hire someone on the promise of giving him 10% of his earnings, doesn’t that sound like a great deal? It would certainly look to me like that would help Citi repay its debt a lot quicker. And so of course, this person is hired and thanks to huge success and a great team, the unit managed by this person generates $1 billion.The issue then becomes if you can afford to pay the bonus. And by afford, I mean defending the payout to the American public.

Now, in this specific case, a lot of the media focus is about Citigroup being in such a bad shape financially that it perhaps cannot afford to pay out Mr. Hall’s payout. To me, the real question is if Citigroup can afford to NOT pay this bonus. In my opinion, not paying the bonus and not being able to go ahead of its shareholders to explain would certainly make things a lot more difficult in the future. The type of people that can generate this much money will not take a chance on a company if they believe that the bonus they are owed will not be paid.

There are a lot of alternatives of course and one of them is for Citigroup to “spin off” the unit and thus reward Mr Hall’s new firm by paying it a percentage of its gains. Then of course, it would the firm paying a $100M bonus instead of Citigroup. That solution of course would create less outrage but it’s a shame if we really need to do so many actions to hide what is simply the reality… that Mr Hall deserves his big payout.

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6 Comments

  1. Comment by Zavi — July 28, 2009 @ 7:20 am

    I agree with you. You want to retain your key personnel, you will need to remain competitive with rivals. Performance will be rewarded by high salary and… bonuses! And for companies like banks that received government funds, it’s a big issue… this is still our tax money!

  2. Comment by IS — August 2, 2009 @ 11:40 am

    but do you think they should not pay him for his performance then?

  3. Comment by Zavi — August 5, 2009 @ 12:15 pm

    there is no right answer! that’s the problem!

  4. Comment by IPlatotle — August 9, 2009 @ 12:51 am

    I liked it the way they did it in post W.W.II days until Kennedy, including during Eisenhower’s presidency. Tax the wealthy at the 90% level. The economy did great those years, much better than now, in fact. And charity for the poor caused much less national indebtedness than giving to our wealthiest few has caused.

  5. Comment by Mark — September 18, 2009 @ 8:47 am

    The 1 Bn profit earned by Philbro may sound big, but it does not necessarily demonstrate efficiency of Mr Hall & team. It was Citibank’s money that Philbro used for doing trading or investments and generated 1 Bn profits. One needs to see how much leaverage or credit risk they utilized, how much risk they placed on Citigroup, and, compare these numbers with their earnings. Sure, if Citigroup gives 100 billions to play with, any smart person will be able to place bets and earn 1 Bn in profits, thats just 1% he earned putting the bank at risk for 100 Bn. That does not deserve 100 million reward.

    Second point is the ethics through which Philbro team placed bets and earned money. This unit trades heavily on the oil and gas taking advantage of fluctuating prices of crude oil and refined oil (gasolene, etc). The production cost of per barrel of oil is less than 20 dollars, however, end users pay around 70 dollars, and, a big chunk of that inflated price is due to heavy trading activity in the commodities market. Oil and Gas is being used like shares, the profits generated are coming out of the pockets of you and me – the ordinary guys that drive cars and must fill their tanks, or, average Joe’s that need their house heated in the winter. This average Joe has no choice, he did not enter into the commodities market, he is not trading, but, he pays !! it is different scenario in the stock market, where Joe makes a concious choice of doing investment – if he pays or loses on his stock, then it is fair because it was his gamble. But for essential commodities, average person is not even in the market but plays outstandingly high price due to trading.

    Think about this — if someone trades on the Honda cars or Toyota cars and due to which their cars are 50% higher in cost — will you ever buy them ? Absolutely not. You can afford to skip them because these are not essential commodities. And that is why no one is trading on such items. But they trade heavily on essential commodities – Now you know why.

    It is not just Citigroup, but all big financial firms, private firms (read – everyone that has abandunce of money) flexes their financial mussle in such markets where average Joe is paying, and, they have their “talent” dream team like Mr Hall. Citigroup has no shame in taking billions of bailout from average Joe, give that to their dream team, and, share the gravy with Mr Hall where he can own a castle and fine art. Citigroup has nothing to lose – the initial investment came from average Joe, the profits are made at the cost of hardship to this Joe, so, what’s harm sharing the 10% gravy with Mr Hall ?

  6. […] a few months ago when it was reported that Citigroup trader Andrew Hall was earning a 100$M annual bonus? Many expressed the opinion that it was crazy, an exageration and that no one should be making that […]

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