Freddie Mac 2011 Annual Report Download - page 335

ITEM 11. EXECUTIVE COMPENSATION
Executive Summary
Our principal goal under conservatorship has been to keep the company functioning so we can continue to carry out
our housing mission. We are particularly concerned about our ability to fulfill our mission if we are unable to attract and
retain competent and experienced executives — a very real concern given the uncertainty surrounding our future business
model, organizational structure, and compensation structure, which is adversely impacting our internal control
environment. We believe these factors are also contributing to increased levels of voluntary employee turnover, including
17% voluntary turnover at our Senior and Executive Vice President levels in 2011. Additionally, the Conservator directed
us to maintain individual salaries and wage rates for all employees at 2010 levels for 2011 and 2012 (except in the case of
promotions or significant changes in responsibilities). In 2011, we made certain significant reorganizations which included
targeted divisional staff reductions in an effort to manage general and administrative expenses. All of these activities
impact our ability to retain our employees and compensate them for their work. Disruptive levels of turnover at both the
executive and employee levels could lead to breakdowns in many of our operations that impact our ability to: (a) serve
our mission and meet our objectives; (b) manage credit and other risks related to our $2.1 trillion total mortgage portfolio
(including interest rate and other market risks related to our $653 billion mortgage-related investment portfolio);
(c) reduce the need to draw funds from Treasury; and (d) issue timely financial statements.
We are finding it difficult to retain and engage critical employees and attract people with the skills and experience
we need. Because we maintain succession plans for our senior management positions, we were able to quickly fill some
of these positions vacated in 2011, or eliminate them through reorganizations. However, such alternatives are limited and
may not be available to address future senior management departures. While we update our succession plans regularly, in
many areas we have already executed these plans and we may need to search outside the company for replacements to fill
these senior positions. We face increased difficulty filling senior positions given the uncertainty around compensation. We
operate in an environment in which business decisions are closely scrutinized and subject to public criticism and review
by various government authorities. Many executives are unwilling to work in such an environment for potentially
significantly less than what they could earn elsewhere. Accordingly, we may not be able to retain or replace executives or
other employees with the requisite institutional knowledge and the technical, operational, risk management, and other key
skills needed to conduct our business effectively. A recovering economy is likely to put additional pressures on turnover
in 2012, as other attractive opportunities may become available to people who we want to retain.
Also contributing to our concerns regarding executive retention risk is the aggregate level of compensation paid to
our Section 16 executive officers, which for 2011 performance was significantly below the 25th percentile of market-
based compensation. Any compensation changes that appear excessive, abrupt or arbitrary are likely to create heightened
levels of operational risk. We anticipate that any significant adverse changes in executive compensation levels will result
in numerous vacancies in senior positions that are important for our sound operation, since the incumbents in these
positions possess significant business and leadership skills that are in demand elsewhere in the market at substantially
higher levels of compensation. Filling vacancies at further reduced compensation levels with equally capable and
experienced individuals is not likely — especially given the uncertainty and criticism surrounding the GSEs. In this
environment, increased uncertainty and instability in the top ranks would likely cascade down to other officers and
employees. The resulting loss of talent and institutional knowledge would cause an appreciable increase in the operational
risk of the company.
In evaluating the potential impact of legislation to further reduce the pay of our executives and employees, the
Acting Director of FHFA stated in his testimony to the U.S. Senate Committee on Banking, Housing and Urban Affairs
on November 15, 2011 that:
“a sudden and sharp change in pay would certainly risk a substantial exodus of talent, the best leaving first in
many instances. [The GSEs] likely would suffer a rapidly growing vacancy list and replacements with lesser skills
and no experience in their specific jobs. A significant increase in safety and soundness risks and in costly
operational failures would, in my opinion, be highly likely.”
As a result of the increasing risk of employee turnover, we are exploring options to enter into various strategic
arrangements with outside firms to provide operational capability and staffing for key functions, if needed. Should we
experience significant turnover in key areas, we may need to exercise these strategic arrangements and significantly
increase the number of outside firms and consultants used in our business operations, limit certain business activities, and/
or increase our operational costs. However, these or other efforts to manage the risks to the enterprise may not be
successful.
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