compensation paid to executive officers of the two government sponsored
enterprises (GSEs) Freddie Mac and Fannie Mae has generated a lot of attention
both from the media and from Congress.
The Federal Housing Finance Agency (FHFA) as conservator of the GSEs is
responsible for oversight of GSE compensation programs and it estimates that in
2011 the two GSEs collectively paid 90 executives a total of $92 million, and 2,000 senior professionals a total of approximately $455 million. Since 2009, FHFA has directly overseen the GSE's compensation of their two CEOs and approximately 90 other executives
but has delegated to the GSEs the setting of compensation levels for all other employees. The Congressional Budget Office estimates
that the GSEs pay their 11,900 employees about $2 billion annually.
FHFA and the
GSEs have stated that the current levels of compensation
are necessary to recruit and retain
talented executives and other employees. In 2011, Congress held oversight hearings on the
appropriateness of GSE
executive compensation, and legislative measures limiting it were introduced. In March 2011, FHFA-OIG issued a report that evaluated
FHFA's oversight of the GSEs' executive compensation programs, specifically
that of their six most-senior executives.
FHFA OIG released a second report, FHFA's Oversight of the Enterprises'
Compensation of their Executives and Senior Professionals, examining pay practices affecting approximately 2,100 employees, including nearly 90 executives and 2,000 senior
professionals. It updates the
earlier report with information on subsequent initiatives and provides comprehensive data on
senior professional compensation in 2010 and 2011.
Since OIG issued its
initial report, FHFA has taken several steps to strengthen its control and oversight of GSE executive
compensation. In March 2012,
revised their compensation packages, which will result
in significant reductions in the compensation of their CEOs and much smaller reductions in the
compensation of other executives. Further, FHFA has issued a written policy governing executive compensation and conducted examinations to assess GSE procedures.
assuming the conservatorship in late 2008 FHFA, in coordination
with Treasury, developed compensation packages for the
GSEs' executives to align
decision-making with the long-term financial prospects of the
GSEs, minimize costs to taxpayers
and ensure that they could recruit and
retain talented executives and professionals.
The key elements of the executive compensation packages were:
- Base Salary,
capped at $500,000 except for CEOs, COOs, and CFOs whose base salaries ranged
- Deferred Base Salary
consisting of a fixed portion and a performance-based portion; and
- Long-Term Incentive Awards (LTI) designed to provide executives with incentives to meet specific
corporate and individual performance measures
and retain them at the GSEs.
Fannie Mae's and Freddie Mac's former CEOs received
a total of $10.7 million in cash
compensation or "take home pay" pursuant to the package. The median cash compensation at the
Executive Vice President (EVP) level declined by 8.8 percent to $1.7 million in
2011 and the median level for senior vice presidents (SVP declined from
$763,000 to $724,000 from 2010 to 2011.
This decline was likely due to a variety of factors including a 2010 pay
freeze FHFA implemented which limited pay increases to promotions and to
turnover at high levels.
In 2012, both GSEs hired new CEOs under executive
compensation packages approved by FHFA in March of that
year. The packages eliminated LTI and reduced executives' annual compensation, other than that of the CEOs, by 10%. Although FHFA initially targeted CEO total direct compensation at $500,000, Freddie Mac's new CEO will earn $600,000. This
represents a reduction of cash compensation of 88%
the $5.1 million
that the former CEO received in 2011. An FHFA official explained that
the figure incorporated all factors necessary to attract the candidate, including his commuting
and living expenses.
Fannie Mae's new CEO was already employed as Chief Administrated Officer, General Counsel
and Corporate Secretary and
agreed that he
would be compensated in accordance with the terms of his previous
position however his total
direct compensation will be reduced to $600,000 starting on January 1, 2013, which is 89%
lower than the $5.6 million
that Fannie Mae's former CEO received in 2011.
and GSE officials have expressed concern that these
reductions in compensation could make it more difficult for the Enterprises to recruit and retain
executives and other employees, especially if the pay freeze put in
place in 2010 remains in effect indefinitely.
FHFA has taken several other steps to strengthen its oversight of executive
compensation including implementing
recommendations in OIG's March 2011 report;
developing written guidelines governing its oversight and reviews of executive compensation and completing
the GSEs' processes for
setting individual executive
FHFA has also established
procedures to routinely
review GSE requests to promote
As compared to its oversight of executive
compensation, FHFA's oversight of the GSEs'
compensation of approximately 11,900 non-executive employees, including about 2,000 senior professionals, has been limited, In addition to imposing the comprehensive pay
freeze, FHFA commented on proposed changes to Freddie Mac's compensation structure for non- executives in 2012, and approved several employee retention
payments. It has
not reviewed, examined, or tested compensation programs as cost mitigating actions nor has it assessed the
GSEs' use of promotions and job changes to determine if they are
designed to circumvent the pay freeze.
FHFA's relatively limited oversight of non-executive compensation is consistent with its view that delegating such day-to-day business decisions to the
GSEs is the most
effective means of managing the conservatorships
and OIG recognizes this. Nevertheless OIG also believes that FHFA
should be reasonably
sure that compensation controls
effectively preserve and conserve GSE assets and limit
taxpayer-related costs. Moreover, it may be appropriate to enhance oversight of senior professionals since as a group of
fewer than 2,000 individuals they collectively received $455 million in cash
compensation in 2011.
senior professionals serve throughout their organizations. VPs typically implement strategies set by division
heads; guide the resolution of complex business decisions; and
approximately 70% of their time on either customer or regulatory relations.
have 10 or more years of relevant experience. Directors generally report to VPs or SVPs and are responsible for one or more departmental areas within a division, implementing strategies set by division
heads and having
day-to-day responsibility for the work product produced by their departments.
They typically have eight or more years of experience.
Senior professional compensation packages
are similar to those of executives including annual base pay and "other compensation," but base pay accounts for a larger share
than in the case of executives because senior professionals are less directly
accountable for the GSEs' overall
setting senior professional compensation levels is
generally similar in that both use market data in the process and both employ consulting
firms that conduct confidential compensation surveys within a range of industries including financial services
and both seek to establish target aggregate compensation at the
identified median market level.
They differ in the details of establishing target levels. In 2011 the
median value of the VPs' total
cash compensation paid was $388,000 and the median for Directors was $205,300.
the ongoing pay freeze, FHFA's oversight has been limited and it has not reviewed or examined
non-executive compensation costs
to determine if they are reasonable and justified. OIG
found several general issues and
risks associated with Senior Professional
Structures merit review.
compensation structures for senior professionals
and other employees at the two GSEs make it possible that one structure offers greater benefits
should assess the risk that one GSE might compensate senior positions
materially higher than the other to ensure consistency
and control costs.
- The GSEs may not have sufficient reporting systems
to ensure they are appropriately targeting compensation to median market levels
OIG tested GSE compensation offers made to
potential hires in 2011 at a particular senior
OIG found that offers were not
consistent between the two GSEs and that variation was sufficient to warrant further scrutiny by FHFA. Without testing and verification on a larger scale, FHFA lacks assurance that GSE compensation can be supported.
FHFA has established a process to review GSE implementation of the 2010
mandated pay freeze with respect to their
requiring the GSEs to submit proposed executive promotions
for review and approval. However FHFA has not yet conducted any similar reviews or examinations with respect to senior professionals and other
employees although officials said
are planning to do so. OIG observes that the median cash compensation paid to senior professionals increased as much as 5% in 2011, despite the imposition of the
freeze. It is possible that LTI payments account
for much of this increase, but promotions and changes in responsibility also may have played a role. However,
lacking reviews or examinations, FHFA is not in a position to determine whether
the GSEs are consistently enforcing the pay freeze or using promotions and/or changes in responsibility to offset it.
concluded that over the past year, FHFA has increased its
control and oversight of the GSEs' executive compensation of $92 million annually. Although this focus is
compensation is a comparatively small portion of overall expenditures in this area. Accordingly, OIG believes that FHFA has a responsibility to enhance
its current non-executive compensation oversight through reviews or examinations.
The plan should set priorities, ensure that available staffing resources are commensurate with them, and establish an appropriate timeframe for its implementation. The Agency should consider including the following items as priorities:
- GSEs' general structures, processes,
and cost controls
for senior professional compensation;
- GSEs' controls over
compensation offers to new
compliance with the pay freeze with respect to the use of promotions and
changes in responsibility.