Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), vigorously defended the executive compensation system in place at the government-sponsored enterprises (GSEs) by claiming that challenges of running Fannie Mae and Freddie Mac require generous salaries.
In testimony delivered today before the U.S. Senate Committee on Banking, Housing and Urban Affairs, DeMarco rejected the notion that qualified leadership can be achieved by offering modest salaries.
‘Some have suggested that we should have no trouble maintaining adequate staffing at far smaller pay levels, pointing to outstanding cabinet members who serve or have served with distinction on government pay scales,’ DeMarco said. ‘I have serious doubts about taking this approach to the management of the enterprises.
‘By working at Fannie Mae or Freddie Mac,’ he added, ‘your work comes under a much higher degree of scrutiny and criticism, and with a lot less job security than comes with working for any other private firm engaged in housing finance. Executives who have spent a career developing their reputations risk tarnish to those reputations under the highly charged environment in which these companies operate today, regardless of how well they perform their duties or how great a financial sacrifice they make forsaking other private-sector opportunities to assist the country's housing finance system.’
DeMarco also cited the ‘uncertain future’ of the GSEs as being a determining force in designing and maintaining the current compensation structure.
‘To encourage talent to stay put, the FHFA made deferred payments generally dependent on an executive's continued employment at the enterprise,’ he stated. ‘We also made half of the deferred pay subject to adjustment based on corporate performance to partially simulate the effect of corporate performance on the corporate shares paid to executives at [Troubled Asset Relief Program] firms for their deferred pay. That allows for reductions in deferred salary if the enterprise's goals, as set by the board with increasing input from FHFA, are not met.
‘Based on review of past compensation, the market comparables identified by outside pay consultants, discussions with each board of directors, recent experience in recruiting CEOs, and consultation with the Treasury Department,’ he continued, ‘the FHFA settled on a target of $6 million a year for each CEO, $3.5 million for the chief financial officers and less than $3 million for executive vice presidents and below. That amount rolls back enterprise CEO pay to pre-2000 levels. It is less than half of target pay for enterprise CEOs before the conservatorships. For all executive officers, Fannie Mae and Freddie Mac have reduced target pay by an average of 40 percent.’
However, DeMarco added that future GSE leaders may see smaller take-home pay.
‘At the present, my plan for executive compensation is to continue to seek opportunities for gradual reductions, particularly when executives leave,’ he said. ‘This approach is consistent with the administration's notion of a gradual wind down. I also believe it important for FHFA to continue to assess the corporate scorecards used to improve the alignment between the scorecards and the goals of conservatorship.’