The 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. 

Today 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, FHFA 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.

After assuming the conservatorship in late 2008 FHFA, in coordination with Treasury, developed compensation packages for the GSEs' executives to align executive 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 from $600-900,000.
  • 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% from 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 FHFA 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.

FHFA 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 examinations to assess the GSEs' processes for setting individual executive compensation levels.  FHFA has also established procedures to routinely review GSE requests to promote their executives.

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.

These senior professionals serve throughout their organizations.   VPs typically implement strategies set by division heads; guide the resolution of complex business decisions; and focus approximately 70% of their time on either customer or regulatory relations. Typically, VPs 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 performance.  

Each GSE's approach 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.

Beyond 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 Compensation Structures merit review.

  • Different compensation structures for senior professionals and other employees at the two GSEs make it possible that one structure offers greater benefits
  • FHFA 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 professional rank. 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 executives, 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 they 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 pay 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.

OIG 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 appropriate, executive 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 hires; and
  • GSEs' compliance with the pay freeze with respect to the use of promotions and changes in responsibility.