|Date of Memorandum:||02/23/2009|
|Expiration Date:|| |
|Signed By:||Strom, Leland|
|FCA Contact Person:||Strom, Leland|
|List of Attachments:|
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February 23, 2009
To: Board of Directors
Each Farm Credit System Institution
From: Leland A. Strom
Chairman and Chief Executive Officer
Subject: Executive Compensation and Benefits Programs
Last fall I shared my thoughts with you about the current and future challenges facing the Farm Credit System. I emphasized that as the System’s safety and soundness regulator, FCA will do its part to ensure that you have the guidance you need to keep your institutions safe and strong. I also noted that FCA staff has stepped up its efforts to monitor and respond to events that may arise in the current environment, and that we will continue to communicate with you for the continued success of your institution and the System as a whole.
As we move through these challenging times, I would like to share some additional thoughts with you about the recent Government and public outcry over excessive executive compensation packages. Most of this concern has been aimed at failing or troubled financial institutions that received Federal financial assistance but continued to provide excessive compensation packages, including bonuses and other perks, to their CEOs and top executives.
System institutions are not failing or receiving assistance from the Government. As I pointed out at the Farm Credit Council Annual Meeting last month, the System is financially strong and well positioned. It has good credit quality, adequate capital, strong earnings, and sufficient liquidity. As one might expect, the System’s strong financial performance is reflected in the executive compensation programs of its CEOs and senior managers. However, recognizing that System institutions are Government-sponsored enterprises and cooperatively owned, FCS boards have generally used good governance in overseeing and monitoring executive compensation programs with an eye on keeping them reasonable and fair.
Nevertheless, as the financial landscape is changing, the compensation landscape is also changing. We have all noted the growing climate of hostility with compensation and other corporate perks that are excessive relative to the firm’s financial and operational performance, and return to shareholders.
While I fully support executive compensation programs that reward success and retain outstanding talent, I think it is important to also be mindful of the current business environment as well as the potential perception by the public and Congress. We expect the board of each Farm Credit System institution to be diligent and prudent in its decisions regarding the issues of compensation and benefits program costs in this environment. The compensation topic is addressed in our current regulations under §620.31, which require each Farm Credit bank and association to establish and maintain a compensation committee. The committee is responsible for reviewing the compensation policies and plans for senior officers and employees, as well as approving the overall compensation program for senior officers.
As you direct the compensation and benefits programs in your institutions, I urge you to carefully consider all of the issues, such as performance and retention, appropriate long-term and current incentive compensation, benefits packages, and concerns of your cooperative membership. I further suggest that you fully quantify and understand both the near-term and long-term expenses and financial consequences associated with the entirety of the executive compensation program and benefits you approve. It is also important, as always, to pay particular attention to any potential reputation risks as a GSE.
The Farm Credit Act of 1971, as amended, also requires FCA’s examinations of banks to include an analysis of CEO compensation and employee salary scales. This is a requirement maintained by Congress after it removed provisions for FCA approval of System compensation programs. While we rely on System bank boards of directors to address compensation matters, I have asked FCA staff to review examination procedures, governing regulations, and activities in these areas.
In closing, today’s business environment presents challenges and strategic risks that require your careful consideration as you navigate your institutions through these difficult and uncertain times to successfully accomplish the GSE’s mission. As I communicated to you last fall, FCA will continue to support the System in fulfilling that mission, maintaining financial prudence and continuing strong governance of System institutions by boards of directors.
Copy to: Chief Executive Officer
Each Farm Credit System Institution