Shareholders were frustrated in part because the stock had plunged 44 percent in 2011, after adjusting for a reverse stock split. So far in 2012, it has regained about half of its 2011 losses.
The retention pay was to vest in 2013, as an incentive for Pandit to stay on as CEO. A bank spokeswoman said he would not receive any of that money.
In March, Citigroup surprised observers by failing its stress test, the Federal Reserve's annual checkup for banks. The Fed said Citi, unlike any of its peers, did not have enough capital to raise its stock dividend and still withstand a financial crisis worse than 2008.
Pandit, 55, said in a statement Tuesday that "now is the right time for someone else to take the helm at Citigroup" after the bank "emerged from the financial crisis as a strong institution."
Both Pandit and Corbat sent memos to Citi's 262,000 employees early Tuesday. Pandit did not say why he was leaving, but gave the impression that he felt he had completed a mission.
"There is nothing better than our third quarter earnings announcement to demonstrate definitively that we have turned this company around," he wrote.
Corbat said he was humbled and excited, calling himself "a true believer in this company." He praised Pandit for leading Citi "back to its roots as a bank."
Corbat also noted the challenges ahead — "regulatory, legislative and economic changes around the world present headwinds as we redefine our relationships with all of our stakeholders."
Pandit joined Citigroup in 2007 when the hedge fund he founded was acquired by the bank. He quickly rose to CEO in December 2007. Earlier, he had ascended to head of investment banking at Morgan Stanley before leaving in 2005 to form the hedge fund.
A native of India, Pandit attended Columbia University at 16 and completed a bachelor's degree in three years. He earned a doctorate in finance in 1986.
Pandit faced harsh criticism after Citigroup took $45 billion in government bailout money in the 2008 credit crisis. It is widely believed that other, stronger banks were forced to take billions in bailout money to divert attention from Citigroup, whose financial situation was more precarious.
The U.S. Treasury sold the last of its stake in the company in December 2010.
In October 2011 the company agreed to pay $285 million to settle civil fraud charges that it misled buyers of a complex mortgage investment just as the housing market was starting to collapse.
The Securities and Exchange Commission said Citigroup bet against the investment in 2007 and made $160 million in fees and profits. Investors lost millions.
Citigroup neither admitted nor denied the SEC's allegations in the settlement.
Goldman Sachs paid $550 million to settle similar charges and JPMorgan Chase & Co. paid $153.6 million. All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.
In December 2011 Pandit announced the company would eliminate 4,500 jobs to cut costs. The cuts represented about 1.5 percent of its global workforce of 267,000. When he was first hired in 2007, the company had 375,000 employees.
A naturalized citizen, Pandit lives in New York with his wife and two children.
AP Business Writer Christina Rexrode in New York contributed to this report.
Daniel Wagner can be reached at www.twitter.com/wagnerreports .