Citi overhauls bonus system to strengthen conduct culture

Poor conduct score can eliminate bonus regardless of profit contribution

Citi tweaks cash incentives
Citi hopes to improve its conduct culture with new bonus metrics
Risk montage

Citi has changed its compensation model in response to the benchmark fixing scandals that have rocked the industry, to ensure the need to establish the correct conduct culture is not overlooked in the quest for profit.

Delivering the keynote address at Risk USA on October 25, Mark Carawan, Citi’s chief compliance officer, said performance scores had previously been aggregated. This would allow a manager rated excellent in profitability but poor in conduct to average a passing grade and earn a bonus.

“Not this year. If there are behaviours that have been inappropriate, such as not reducing [a position], or taking a position that wasnt authorised, thats a zero bonus,” Carawan said.

In 2016, the Commodity Futures Trading Commission fined Citi $250 million for attempting to manipulate and make false reports concerning the US dollar IsdaFix, a global benchmark for interest rate swaps products, between 2007 and 2012.

The CFTC also required Citi to strengthen its internal controls and procedures, including measures to detect and deter trading potentially intended to manipulate swap rates such as IsdaFix and to ensure the integrity of interest rate swap benchmarks. The compensation overhaul is part of Citi’s response.

“It has helped us refine our culture and to look at conduct, particularly as we are evaluating what we were [doing] in strengthening our governance, risk management and control environment following the issues that have been identified in rate fixing,” Carawan said.

The compensation system at Citi measures the ‘what’ — whether the manager met or exceeded goals — as well as the ‘how’ — whether the manager conducted themselves in an ethical manner. Managers are graded from excellent to poor in each category. Citi recently completed its first round of performance evaluations under the new system.

New metrics

“One of the challenges we have in looking at culture, conduct and behaviours is how we come up with metrics that reward and incentivise good behaviour, and not just focus on infractions and breaches,” said Carawan. “How do we evolve better metrics for the ‘how’ that match the work done by the risk community on the quantitative side for the ‘what?’”

Regulators have been pushing banks to align compensation with conduct and ethics. In April 2014, the Financial Stability Board issued supervisory guidance for establishing a risk culture. This stipulated that annual performance reviews and objectives-setting processes should be linked to promoting core values and behaviours, as well as compliance with policies and procedures, including addressing deficiencies highlighted by internal audit and supervisory findings.

Citi has developed a balanced scorecard for performance measurement that, in addition to the usual components for financial and operating performance, contains performance measures for culture, conduct and controls. It is making further adjustments this year to align the scorecard to the new bonus system.

“There is a strong belief that people are motivated by incentives,” said Carawan, “whether they are positive incentives or consequences.”

Five years ago, Citi established a board-level ethics and culture committee that sits alongside the risk management and audit committees, with the aim of ensuring the bank assigns the same importance to organisational culture as to risk management and audit.

“All the independent non-executive directors on the board who are members of this [culture] committee take it extremely seriously and are driving the risk management, human resources functions and the front lines to make changes, whether its tone from the top, communication, training, or ultimately incentive programmes,” said Carawan.

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