Executive Compensation

Proposal
2

Advisory Approval of Our Executive Compensation

Our Board is committed to corporate governance best practices and recognizes the significant interest of stockholders in executive compensation matters. We are providing this advisory vote pursuant to Section 14A of the Exchange Act.

As described in detail under the headings “Our Management Structure” and “Compensation Paid by our Manager to our Named Executive Officers” above and “Compensation Discussion and Analysis” below, we are externallymanaged by our Manager pursuant to the Management Agreement between our Manager and us. Our Manager is responsible for paying all compensation expense associated with managing us and our subsidiaries. We pay our Manager a management fee, and our Manager uses the proceeds from the management fee to pay compensation to our Manager’s personnel, including our NEOs other than Mr. Keyes (who does not receive any compensation for serving as our Chief Executive Officer, but has an interest in the management fee as an indirect equityholder of our Manager); however, the Company does not allocate any specific portion of the management fee we pay to the compensation of our NEOs and we do not reimburse our Manager for the cost of such compensation. Our Manager makes all decisions relating to the compensation of our NEOs based on the factors our Manager determines to be appropriate, including both individual and Company performance, and subject to the terms of any employment agreement entered into between our Manager and an individual NEO. Our Compensation Committee has no authority to influence or determine how our Manager compensates our NEOs. Our Manager does not consult with the Compensation Committee prior to making compensation determinations for our NEOs, including how much such officers are paid.

Our NEOs are eligible to receive equity awards pursuant to our equity incentive plan, which is administered by the Compensation Committee. No equity awards were made to any of our NEOs in 2016. In 2016, we did not pay any compensation to our NEOs.

The Board recommends that the stockholders vote in favor of the following resolution:

“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”

While this vote is advisory and not binding on us, our Board and Compensation Committee value the views of our stockholders and will consider the voting results when making compensation decisions regarding our equity incentive plans.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THIS RESOLUTION.

Named Executive Officers

Our NEOs for 2016 are:

Name Title
Kevin G. Keyes Chief Executive Officer (CEO), President and Director
Glenn A. Votek Chief Financial Officer (CFO)
David L. Finkelstein Chief Investment Officer (CIO)
Timothy P. Coffey Chief Credit Officer (CCO)
Anthony C. Green Chief Legal Officer (CLO) and Secretary

Compensation Discussion and Analysis

As discussed above, our Manager pays all of the compensation, including benefits, to its employees (including our NEOs other than Mr. Keyes). Although certain personnel (but none of our NEOs) are employed by our subsidiaries for regulatory or corporate efficiency reasons, all compensation and benefits paid to such personnel by our subsidiaries reduce, on a dollar-for-dollar basis, the management fee we pay to our Manager. The proceeds of the management fee are used in part to pay compensation to our Manager’s personnel, including our NEOs other than Mr. Keyes (who does not receive any compensation for serving as our Chief Executive Officer, but has an interest in the management fee as an indirect equityholder of our Manager); however, the Company does not allocate any specific portion of the management fee we pay to the compensation of our NEOS and we do not reimburse our Manager for the cost of such compensation.

Accordingly, we did not pay any cash compensation to our NEOs, nor did we grant them any plan-based awards, for 2016. We do not provide our NEOs with pension benefits, perquisites or other personal benefits. The Company is not party to any employment agreements entered into between our Manager and individual NEOs, and we do not have any arrangements to pay such individuals any cash severance upon their termination or a change in control of the Company. As a result, no compensation is includable in the Summary Compensation Table for the NEOs.

Pursuant to the terms of the Management Agreement, we pay our Manager a monthly management fee equal to 1/12th of 1.05% of our stockholders’ equity, as defined in the Management Agreement, for its management services, which was approximately $152 million during the year ended December 31, 2016.

Our Manager, which is a private company that is not subject to the disclosure requirements of the SEC, has sole discretion to determine the compensation it pays to its employees, including our NEOs. Under the terms of the management agreement, our Compensation Committee has no decision-making role related to and is not entitled to approve our Manager’s compensation decisions. Our Manager does not consult with the Compensation Committee prior to making any compensation determinations for our NEOs. Rather, as discussed above, the Compensation Committee is responsible for annually reviewing the performance of, and fees paid to, our Manager under the Management Agreement and for making recommendations to the independent members of the Board. For additional information, please see “Certain Relationships and Related Party Transactions”, “Our Management Structure” and “Compensation Paid by our Manager to our Named Executive Officers” above.

As noted above, the Company has no specific compensation arrangements for our Manager’s employees who are furnished pursuant to the Management Agreement to serve as the Company’s NEOs, and our Manager makes all compensation determinations for its employees without any direction by the Board and without reference to any specific policies or programs under the oversight of the Board. Our Manager compensates its employees (including our NEOs) for a variety of services performed for the benefit of our Manager. Thus the compensation paid by our Manager to its employees who are serving as the Company’s NEOs is not considered to be part of the Company’s executive compensation program.

Consideration of “Say-on-Pay” Voting Results

We reached out to investors representing 65% of shares held by institutional investors

At our 2016 Annual Meeting, 53% of the votes cast supported our advisory resolution on the fiscal year 2015 compensation of our NEOs (commonly known as a “Say-on-Pay” vote). While the Say-on-Pay vote received majority support, the Compensation Committee was disappointed with the percentage of votes cast against the proposal. The Company promptly embarked on a multi-pronged effort to gather feedback from key stakeholders regarding our compensation and external management structures. These efforts included:

  • Outreach to investors representing 65% of shares held by institutional stockholders, including 45 of our 50 largest stockholders
  • Internal discussions with our Manager’s employees
  • Analysis of market practices at peer companies
  • Advice from compensation consultants
  • Attendance at investor conferences
  • Discussions with proxy advisory services and corporate governance research firms

During the course of this review, we identified that certain stockholders and other key stakeholders would like the Company to provide expanded disclosure on our Manager’s executive compensation program in order to enable them to fully evaluate such program, including the degree of alignment between executive pay and Company performance. In order to address these concerns, our Manager has provided the Company with certain qualitative information about its executive compensation program for this proxy statement. In addition, our Independent Directors specifically requested that our Manager establish a framework for isolating the portion of the management fee allocable to 2017 NEO compensation so that the Company can provide related quantitative information in our 2018 proxy statement. For additional details, please see “Compensation Paid by our Manager to our Named Executive Officers – Changes for 2017” above.

We will continue to consider the outcome of future Say-on-Pay votes, as well as stockholder feedback received throughout the year, and invite stockholders to express their views to the Independent Directors as described under “Communications with the Board of Directors.”

Executive Compensation Policies

Stock Ownership Guidelines for Certain Employees

To align the interests of the employees of our Manager with those of our stockholders, the Board instituted expanded stock ownership guidelines for certain employees of our Manager, including our executive officers, in 2016. These guidelines provide for the following ownership levels:

Position Number of Individuals Required Ownership of Annaly Stock Timeframe to Meet Guideline
Chief Executive Officer 1 $10,000,000 April 12, 2019
Executive Chairman 1 1,673,134 shares April 12, 2016
Other Operating Committee Members 7 30% of Annual Total Compensation 5 years
Managing Directors 20 20% of Annual Total Compensation 5 years
Director-Level Employees 33 10% of Annual Total Compensation 5 years
Total 62    

These stock ownership guidelines apply to more than 40% of our Manager’s employees. As of March 31, 2017, all such individuals either met or, within the applicable period, are expected to meet the stock ownership guidelines.

In 2016, we adopted expansive stock ownership guidelines and a four-year stock holding period requirement

Stock Holding Period

Under a policy adopted by the Compensation Committee in 2016, our Manager’s employees (including our executive officers) are required to hold for a period of four years the net after-tax shares of Company stock they receive through stock option exercises or vesting of equity incentive awards.

Prohibition on Hedging Company Securities

We have a policy prohibiting our Manager’s employees (including our executive officers) from engaging in any hedging transactions with respect to our equity securities held by them, which includes the purchase of any financial instrument (including forward contracts and zero cost collars) designed to hedge or offset any decrease in the market value of our equity securities.

Prohibition on Pledging Company Securities

In 2016, we adopted a policy prohibiting our Manager’s employees (including our executive officers) from holding Company securities in a margin account or pledging Company securities as collateral for a loan.

Risks Related to Compensation Policies and Practices

As discussed above in “Our Management Structure,” our Compensation Committee is not entitled to approve compensation decisions made by our Manager and our Manager does not consult with the Compensation Committee prior to making any such decisions. Therefore, the Compensation Committee has no compensation policies or practices applicable to, or decision-making role regarding, the manner in which our Manager uses the management fee to cover its operating expenses, including employee compensation. However, in connection with the Compensation Committee’s administration of the Company’s equity incentive plan, the Committee conducts an annual risk assessment of the Company’s compensation policies and practices applicable to such plan. In 2016, the Compensation Committee determined that these compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us.

Executive Compensation Tables

Summary Compensation Table

We did not pay any compensation to our NEOs with respect to the years ended December 31, 2016, December 31, 2015 or December 31, 2014.

We did not pay any cash or equity compensation to our NEOs for 2016. We do not provide them with pension benefits, perquisites or other personal benefits.

Grants of Plan-Based Awards

We did not grant our NEOs any plan based awards in 2016.

Outstanding Equity Awards at Fiscal Year-End

None of our NEOs had outstanding equity awards at December 31, 2016.

Options Exercised and Stock Vested

No options were exercised and no stock vested for our NEOs during 2016.

Pension Benefits and Nonqualified Deferred Compensation

We do not provide our NEOs any benefits pursuant to defined benefit plans and nonqualified deferred compensation plans.

Potential Payments upon Termination or Change in Control

We are not responsible for any amounts payable or any additional vesting of outstanding equity awards for any termination of service by any of our NEOs. No amounts would have been payable by us to any of our NEOs upon a change in control as of December 31, 2016.

Compensation Committee Report

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

Donnell A. Segalas (Chair)    John H. Schaefer    Jonathan D. Green    E. Wayne Nordberg

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee is comprised solely of the following Independent Directors: Messrs. Segalas (Chair), Green, Nordberg and Schaefer. None of them is serving or has served as an officer or employee of us or any affiliate or has any other business relationship or affiliation with us, except his service as a Director, and there are no other Compensation Committee interlocks that are required to be reported under the rules and regulations of the Exchange Act.

Proposal
3

Advisory Vote on the Frequency of Future Advisory Votes to Approve our Executive Compensation

As required pursuant to Section 14A of the Exchange Act, we are seeking a vote from stockholders as to how frequently (a “Say-on-Frequency” vote) we should hold Say-on-Pay votes. By voting on this proposal, stockholders may indicate whether they would prefer that we conduct future Say-on-Pay votes once every one, two or three years. Stockholders may also abstain from casting a vote on this proposal.

The Board has determined that conducting a Say-on-Pay vote every year is the most appropriate alternative for the Company. In reaching this recommendation, the Board considered that holding an annual Say-on-Pay vote is consistent with the preference expressed by our stockholders in response to our prior Say-on-Frequency vote in 2011, where a majority of the votes cast voted to hold an annual Say-on-Pay vote. In addition, the Board recognizes that holding a Say-on-Pay vote on an annual basis is a corporate governance best practice and is consistent with the Company’s policy of facilitating communications of stockholders with the Board and its various committees, including the Compensation Committee.

Although the Board intends to carefully consider the voting results of this proposal, the vote is advisory and not binding on the Company or the Board. The Board may decide that it is in the best interests of stockholders and the Company to hold an advisory vote to approve our executive compensation more or less frequently than the frequency preferred by stockholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU SELECT “EVERY ONE YEAR” FOR THE FREQUENCY OF FUTURE ADVISORY VOTES TO APPROVE OUR EXECUTIVE COMPENSATION.