Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
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
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.
Number of Pages in PDF File: 15
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
Date posted: February 2, 2005 ; Last revised: May 5, 2009