Mr. Gary K. Van Meter
Director, Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090
RE: Proposed Rule on Compensation, Retirement Programs, and Related Benefits – 77 FR 3172
Dear Mr. Van Meter:
Thank you for the opportunity to comment on the Farm Credit Administration’s proposed regulation regarding disclosures to stockholders on executive compensation, retirement programs and related benefits, which was published in the January 23, 2012 Federal Register.
I agree with and support the points raised in our Association’s comment letter and in the Farm Credit Council (FCC) comments on this matter. As a client-owner, and as current chairperson of our Association’s compensation committee, I offer these additional comments for you to consider:
I believe that our disclosures on executive compensation and benefits are adequate. Our Association conducts an annual client survey, hosts advisory group discussions, and our board members interact frequently with our client-owners. I have not received any feedback from stockholders asking for additional disclosures on executive compensation.
Our cooperative structure means directors are independent from management and that stockholders have the opportunity to hold directors accountable for serving the Association’s interests through regular elections. Management members are prohibited from participating in director elections. All voting stockholders each have one vote regardless of stock investment, giving each stockholder equal say in Association matters. Unlike in some publicly-traded companies, Farm Credit Association management does not receive stock options, and has no incentive to manipulate share prices, nor serve on the board of directors. This structure adequately protects against executive compensation abuses that other companies have experienced.
Advisory Shareholder Vote
Our compensation committee strongly objects to any requirement for a non-binding “say on pay” vote for executive compensation.
Our committee, consisting of only board members, conducts an extensive analysis each year on executive compensation, retirement plans, and benefits, and makes a full report to the board of directors, including a detailed analysis of executive compensation and benefits from both Farm Credit System peers and other banks and financial institutions. This data routinely shows that our executive compensation levels are below peer group averages in both Farm Credit and commercial bank comparisons. We regularly engage and pay outside experts to assist with this analysis and to make recommendations for our consideration on executive compensation and benefits matters. We undertake this analysis as a best practice, and because FCA has provided guidance to suggest these activities. Also, our committee members attend several days of training each year on executive compensation and human resources matters to aid our understanding of the issues and the important decisions we must make. We rotate our compensation committee membership every few years, so that a majority of the board members have received such training and participated in this detailed annual analysis. Our board is well-equipped for its annual executive compensation discussion and vote.
A “say on pay” advisory vote from stockholders, who have not been fully trained or adequately informed on these issues, would undermine our board and committee’s rigorous process. Our Association resources should not be spent attempting to educate all stockholders so that their advisory vote would be credible and provide meaningful feedback to the board. Rather than imposing this costly requirement, FCA should deal with any Farm Credit institution board that is not performing its fiduciary duties through the existing enforcement process.
Further, in our view, the 15% threshold for an advisory vote may actually lead to inflation of executive compensation over time. Our Association executive pay structure includes a significant performance-based component, which causes executive compensation to vary based on the company’s financial, asset quality, and marketplace performance goals through plans established by the board of directors. Our board of directors believes strongly that executive compensation should be heavily tied to Association results. With the proposed rule requiring a vote, if the pay goes either up or down by 15% in any reporting period (which is entirely possible under our existing compensation plan), the board could elect to shift a greater share of total compensation from “at-risk” variable performance pay to base pay to avoid triggering an advisory vote. Such a decision to increase the amount of compensation in base salary would ironically cause executive pay to be higher in years in which the Association’s financial results are poor.
Compensation Committee Responsibilities
We believe the existing regulations and guidance provided by FCA are adequate. The proposed regulation interferes with our compensation committee’s discretion to design compensation programs appropriate to our size and complexity. Our Association compensation plans are relatively simple, with base salary and performance pay components, and benefits consistent with the majority of Farm Credit System employers. If we choose to adopt more complex plans, such as long term incentives or other compensation tools, we would modify our procedures to adequately monitor and oversee those plans. FCA’s recent bookletter on the subject provides adequate guidance and direction, and we have adopted procedures tailored to our Association compensation plans consistent with that guidance. Compliance with this guidance can and should be examined, and FCA has authority to deal with individual institutions through its existing enforcement powers, if such institutions are not complying with its prior guidance.
Significant and Material Event Disclosure
We support timely, effective, and meaningful disclosure of significant and material events to stockholders that are relevant to our Association’s financial performance or its safety and soundness. However, the proposed definitions in sections 620.10(c) and 620.15 are too broad.
First, we urge FCA to clarify that not all the events cited in proposed 620.15 (a) (2) may be either significant or material. Generally, whether an item is a significant event is open to interpretation of accounting rules and the legal standard of materiality. We ask that FCA clarify that FCS institutions may interpret these terms using accounting principles and legal standards to determine whether disclosure is required. Requiring these disclosures on the first page of the report inserts FCA into our Association’s operations and management, and may even conflict with GAAP. Also, as this rule is proposed, our Association would be required to make an interim disclosure if a director chose to resign or retire early for personal reasons of family or health. Such disclosure could put the director and the Association in the position of either invading the director’s privacy by disclosing personal information related to their resignation, or leaving unanswered questions that may raise unwarranted stockholder concerns about the situation.
Our 2011 annual report is 57 pages long. Too many technical and detailed disclosures could result in fewer stockholders reading and understanding the report, which is not in our Association’s interest and would not help us further our mission of serving agriculture and rural America.
Compensation, Retirement and Benefits Disclosures
We have concerns about our Association’s ability to comply with some of the disclosures proposed by this regulation. In particular, we are uncertain whether we can comply with the individual disclosures of vested/unvested supplemental retirement plan amounts and funded/unfunded individual pension obligations. This information is already disclosed in the aggregate in the annual report footnotes, and we do not believe individual employee information would be meaningful for our stockholders, even if we could calculate and disclose it accurately. We also object to disclosing individual employee compensation for non-senior officers when those individuals are included in the compensation table. This can cause morale problems among our employees, and could aid competitors in selectively recruiting key employees away from our Association.
As cooperatives, Farm Credit institutions work under a governance model that provides board independence and accountability to shareholders—a dynamic not found in many of the publicly-traded and privately-owned financial institutions that experienced executive compensation abuses. This distinctive difference, along with no past executive compensation abuses across the System, supports that there is no basis for a non-binding advisory vote in the proposed regulation. Further, we believe our current disclosure system for material and significant events provides appropriate and timely information to shareholders.
As a stockholder, I agree timely and accurate financial reporting is important. The current Farm Credit regulations and GAAP requirements regarding compensation disclosures already inform stockholders in a way that allows them to hold the board of directors accountable. For the reasons noted in the FCC comments, our Association comment letter, and this letter, the concepts put forth in the proposed regulation should not be adopted. If FCA decides to finalize some parts of this rule, please clarify the items noted in the FCC comment letter and our Association comment letter.
Again, thank you for the opportunity to provide input on this proposed regulation. If you have any questions about my comments, please contact me.