Fannie Mae 2014 Annual Report Download - page 55

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compensation. As a result, we have not been able to incent and reward excellent performance with compensation structures
that provide upside potential to our executives, which places us at a disadvantage compared to many other companies in
attracting and retaining executives.
In addition, the amount of compensation we pay our senior executives is significantly less than executives’ compensation at
many comparable companies. As discussed more fully in “Executive Compensation—Compensation Discussion and Analysis
—Other Executive Compensation Considerations—Comparator Group and Role of Benchmark Data,” our named executives’
total target direct compensation under the 2014 executive compensation program in aggregate was substantially below the
market median for comparable firms. Our Chief Executive Officer’s annual total direct compensation is $600,000, which was
more than 90% below the market median in 2014. While many of our executives have accepted below market compensation
for the past several years, our inability to increase executive compensation to market levels for the foreseeable future puts us
at greater risk of attrition, and also hampers our ability to recruit new executives. Moreover, our inability to offer market-
based compensation makes succession planning very difficult, particularly for our Chief Executive Officer role.
Congress has considered other legislation in the past that would alter the compensation for Fannie Mae and Freddie Mac
employees. In 2011, the Financial Services Committee of the House of Representatives approved a bill that would put our
employees on a federal government pay scale. Although this legislation was not passed by the House or the Senate, if similar
legislation were to become law, our employees could experience a sudden and sharp decrease in compensation, which would
harm our ability to retain and recruit employees. In addition, the uncertainty of potential Congressional action with respect to
housing finance reform, which may result in the wind-down of the company, negatively affects our ability to retain and
recruit employees.
We face competition from within the financial services industry and from businesses outside of the financial services industry
for qualified employees. Additionally, an improving economy has put additional pressures on turnover, as attractive
opportunities have become available to our employees. Our competitors for talent are generally not subject to the same
limitations on employee compensation. The constraints on our compensation could adversely affect our ability to attract
qualified candidates. While we engage in succession planning for our senior management and other critical positions and
have been able to fill a number of important positions internally, our inability to offer market-based compensation may limit
our ability to attract and retain qualified employees below the senior executive level that could fill our senior executive level
positions if there is an increase in turnover.
If we are unable to retain, promote and attract employees with the necessary skills and talent, we would face increased risks
for operational failures. If there were several high-level departures at approximately the same time, our ability to conduct our
business and our results of operations would likely be materially adversely affected.
Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase
agreement.
We are currently under the control of our conservator, FHFA, and we do not know when or how the conservatorship will
terminate. As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf, and generally has
the power to transfer or sell any of our assets or liabilities. In addition, our directors do not have fiduciary duties to any
person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the
company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS in making or approving a decision
unless specifically directed to do so by the conservator.
We are subject to significant restrictions on our business activities during conservatorship. We may be prevented by our
conservator from engaging in business activities or transactions that we believe would benefit our business and financial
results. For example, we publish risk-based loan level price adjustment grids that specify the additional cash fees we charge
at the time we initially acquire a loan based on the credit characteristics of the loan. These fees allow us to price appropriately
for the credit risk we assume in providing our guaranty on the loans. We do not have the ability to implement changes to
these pricing grids without the approval of FHFA. If the mix of our single-family loan acquisitions changes, and FHFA does
not approve requested changes to our pricing grids in response to these changes, it could adversely affect our financial results
and condition.
In addition, we may be required by our conservator to engage in activities that are operationally difficult, costly to implement
or unprofitable, or that may adversely affect our financial results or the credit risk profile of our book of business. For
example, in 2014, FHFA requested that we reduce our retained mortgage portfolio each year to 90% of the amount permitted
under the senior preferred stock purchase agreement, which requires that we reduce our retained mortgage portfolio at a faster
rate than previously required. This could result in the sale of assets at prices below the levels recorded in our financial
statements or the sale of assets that may be more economical to hold, and will result in a faster decline in the revenues
generated by our retained mortgage portfolio. In addition, as described in “Business—Our Charter and Regulation of Our