Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage

15 Pages Posted: 2 Feb 2005 Last revised: 5 May 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER)

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)


This paper is a case study of Fannie Mae's executive compensation arrangements during the period 2000-2004. We identify and analyze four problems with these arrangements:

- First, by richly rewarding executives for reporting higher earnings, without requiring return of the compensation if earnings turned out to be misstated, Fannie Mae's arrangement provided perverse incentives to inflate earnings.

- Second, Fannie Mae's arrangements provided soft landings to executives who were pushed out by the board for failure; expectation of such outcome adversely affected ex ante incentives.

- Third, even if the executives had retired after years of unblemished service, the value of their retirement packages would have been largely unrelated to their own performance.

- Fourth, both when promising retirement payments to executives and when making theses payments, Fannie Mae's disclosures obscured rather than made transparent the total values of the executives' retirement packages.

Because many other companies have practices similar to Fannie Mae's, our case study highlights some general problems with existing pay practices and the need for reform.

Keywords: Executive compensation, agency problems, pay for performance, nonperformance pay, performance pay, soft landing, golden goodbyes, camouflage, misreporting, restatement, earning manipulation, incentives

JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14

Suggested Citation

Bebchuk, Lucian A. and Fried, Jesse M., Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage. Journal of Corporation Law, Vol. 30, No. 4, pp. 807-822, 2005; UC Berkeley Public Law Research Paper No. 653125; Harvard Law and Economics Discussion Paper No. 505, February 2005. Available at SSRN: https://ssrn.com/abstract=653125 or http://dx.doi.org/10.2139/ssrn.653125

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

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Jesse M. Fried

Harvard Law School ( email )

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HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

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