Fannie Mae changes how it pays people
As part of its penance, to quell the sound bites, and to improve its governance, Fannie Mae has moved to restructure its system of executive compensation:
In an announcement after the stock market closed, the troubled company said its board of directors decided Thursday [March 11, Ed.] that senior executives would be compensated instead based on non-financial factors related to meeting affordable housing goals, making progress on correcting its books, implementing an agreement with regulators to increase capital and tighten internal controls, and “company culture.”
Maybe not that much penance …
Meanwhile, that’s not just a restructuring, it’s also a substantial pay cut:
In the past, Washington-based Fannie Mae has sought to compensate its senior executives, including Raines, at the 65th percentile of their peers in the financial services industry, the company said. The goal now is to pay them at the 50th percentile, or about average.
The changes apply not just prospectively, but also for the annus horribilis just past:
The effect of the changes is that Fannie Mae’s top executives received, on average, a 45 percent pay cut in 2004, the company said. Fannie Mae didn’t pay any cash bonuses or stock options to senior executives last year and agreed to link incentive pay to the new, nonfinancial goals in 2005.
“That which you require to be reported to you will improve, if you are selective. How you fashion your reporting system announces your priorities and sets the organization’s priorities.”
– Donald Rumsfeld, Rumfeld’s Rules, December, 1974
Yep, 30 years ago!
“Well, I was so much younger then … and so was Dick.”
What has Fannie Mae been measuring, and what will it now measure?
Before the new pay policies were instituted, most of a Fannie Mae senior executive’s pay was tied to growth in the company’s earnings per share, and most of it was in the form of a cash bonus and stock options. But for at least 2005, earnings growth won’t be a factor at all, and all of an executive’s incentive compensation will be in the form of restricted stock.
Will these moves reduce Fannie Mae’s vulnerability to structural, systemic risks?
“We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.”
(An archive of my many previous Fannie posts may be found here.)
