NAMED EXECUTIVE OFFICERS

The NEOs for 2017 are:

Name    Title
Kevin G. Keyes   Chairman, Chief Executive Officer (CEO) and President
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

INTRODUCTION

As discussed throughout this Proxy Statement, the Company pays the Manager a management fee, the purpose of which is not to provide compensation to the NEOs, but rather to compensate the Manager for the services it provides for the day-to-day management of Annaly. The proceeds of the management fee are used by the Manager in part to pay compensation to the Manager’s personnel, including the NEOs other than Mr. Keyes (who does not receive any compensation for serving as the Company’s CEO, but has an interest in the management fee as an indirect equityholder of the Manager); however, the Company does not determine the compensation payable by the Manager to the NEOs, the Company does not allocate any specific portion of the management fee it pays to the compensation of the NEOs, nor does the Company reimburse the Manager for the cost of such compensation. The Manager makes all decisions relating to compensation it pays to the NEOs based on the factors, including individual and Company performance, it determines to be appropriate and subject to any employment agreements entered into between the Manager and individual NEOs.

DISCLOSURE ENHANCEMENTS

Given that Annaly does not provide any compensation to the NEOs, historically, the Company disclosed information about the management fees it paid to the Manager, but did not disclose information about the Manager’s executive compensation program. However, at the request of the Independent Directors, the Company has engaged in extensive outreach over the last two years in order to understand the information stockholders need to fully evaluate the Manager’s executive compensation program for purposes of the Say-on-Pay vote.

2017 Changes

In response to conversations with stockholders following the 2016 Say-on-Pay vote and conversations with the Manager, the Manager consented to disclosure of certain qualitative information about the Manager’s executive compensation program in the Company’s 2017 Proxy Statement. The Independent Directors also requested that the Manager provide the following information for disclosure in the Company’s 2018 Proxy Statement:

  • The portion of the management fee that is allocated to NEO compensation paid by the Manager;
  • Of this compensation, the breakdown of fixed vs. variable/incentive pay; and
  • The metrics the Manager uses to measure performance to determine the NEOs’ variable/incentive pay.

2018 Changes

Following the 2017 Say-on-Pay vote, the Company again engaged in a multi-pronged effort to gather stockholder feedback regarding its 2017 compensation disclosure. While stockholders generally appreciated the qualitative information the Company provided about the Manager’s executive compensation program in the 2017 Proxy Statement, others indicated that they needed specific information about the magnitude of NEO compensation and the proportion of variable NEO pay in order to evaluate the alignment between NEO pay and Company performance. In response to this feedback, the Manager has provided the information below about the compensation it paid to the NEOs for 2017.

Summary of 2017 NEO Compensation

  • With the exception of Mr. Keyes (who does not receive any direct or indirect compensation from the Manager or the Company for his services as CEO, but does have an interest in the fees paid to the Manager as an equityholder of the parent of the Manager), each of the other NEOs received a base salary and a performance-based cash incentive bonus for 2017.
  • During 2017, the NEOs as a group received aggregate salaries of $2.8 million and aggregate performance-based cash incentive bonuses of $23.9 million from the Manager. These amounts collectively represent 16.2% of the aggregate management fees the Company paid to the Manager during 2017. On an aggregated basis, the NEOs received 10.3%of their total compensation in the form of base salaries and the remaining 89.7% in the form of performance-based cash incentive bonuses.
  • In determining the cash bonuses it paid to the NEOs for 2017, the Manager considered achievement of both rigorous Company performance metrics, including core return on equity, core return on assets, and operating expenses as a percentage of average equity, along with individual performance objectives.
  • The Manager considered a list of specified peer companies (set forth below under “Company Market Data”), together with advice from the Manager’s compensation consultants, to develop appropriate compensation packages for the NEOs.

Components of the NEOs’ Compensation

The Manager’s executive compensation program includes both a base salary and a performance-based cash incentive bonus. Although the Compensation Committee has discretion to grant equity awards of Company common stock to the NEOs (which it has not exercised since the Externalization), the management fee the Company pays to the Manager is paid entirely in cash and therefore the Manager has no independent ability to provide awards of Company stock as part of the NEOs’ compensation. To address this limitation in the Manager’s executive compensation program, the Manager has structured the NEOs’ performance-based cash incentive bonuses with a mix of both rigorous Company performance metrics and individual performance objectives. The table below describes the objectives supported by each of the Manager’s primary compensation elements, along with an overview of the key design features of each element.

Compensation Element   What It Does   Key Measures
Base Salary  
  • Provides a level of fixed pay appropriate to an executive’s role and responsibilities
  • Evaluated on an annual basis, may be adjusted up or down
 
  • Experience, duties and scope of responsibility
  • Internal and external market factors
Performance-Based Cash Incentive Bonus  
  • Provides a competitive annual cash incentive opportunity
  • Links executives’ interests with stockholders’ interests
  • Incentivizes and rewards superior individual and Company performance
 
  • Based on achievement of both rigorous Company performance metrics (including core return on equity, core return on assets and operating expenses as percentage of average equity), together with individual performance objectives

NEO Pay Mix

The Manager’s executive compensation program is designed so that the majority of compensation is performance-based and “at-risk” to promote alignment of the NEOs’ interests with those of stockholders. In determining payout of the NEOs’ performance-based cash incentive bonuses (which represents the variable portion of their compensation packages), the Manager considered achievement of both rigorous performance metrics, including core return on equity, core return on assets, and operating expenses as a percentage of average equity, along with individual performance objectives. During 2017, Messrs. Votek, Finkelstein, Coffey, and Green received aggregate performance-based cash incentive bonuses of $23.9 million from the Manager.

The base salaries for the NEOs (which represent the fixed portion of their compensation packages) are reviewed annually and may be increased or decreased as the Manager deems appropriate. During 2017, Messrs. Finkelstein, Votek, Coffey and Green received aggregate salaries of $2.8 million from the Manager. On an aggregated basis, Messrs. Votek, Finkelstein, Coffey and Green received 10.3% of their total compensation in the form of base salaries and the remaining 89.7% in the form of performance-based cash incentive bonuses.

2017 NEO Fixed vs. Variable Pay Mix

How the Manager Makes Executive Compensation Decisions

In establishing and reviewing executive compensation packages, the Manager considers the nature and scope of each executive’s role and responsibilities, individual and Company performance, retention considerations and feedback from stakeholders, along with the market data, analyses and recommendations provided by external compensation consultants (as further described below under “Role of the Manager’s Compensation Consultants” and “Market Compensation Data”).

Role of the Manager’s Compensation Consultants

During 2017, the Manager retained Meridian Compensation Partners, LLC, FPL Associates, L.P. and Richter Associates, Inc. for advice and perspectives regarding market trends that may impact decisions about the Manager’s executive compensation program and practices.

Company Market Data

The Manager considers compensation data and practices of a group of peer companies (the “Peer Group”), as well as current market trends and practices generally, in developing appropriate compensation packages for the NEOs.

In determining the Peer Group, the Manager considers both industry and company-specific dynamics to identify the peers with which the Company competes for assets, stockholders and talent. As a result, the Manager focuses on peers within the mREIT industry, as well as asset management companies that manage mREITs, along with other asset managers and financial companies within relevant market capitalization and/or revenue bands. The Manager annually reviews the Peer Group and may update its composition to better reflect the Company’s competitive landscape or, if necessary, to account for corporate changes, including acquisitions and dispositions.

COMPENSATION PEER GROUP

Affiliated Managers Group, Inc.
AGNC Investment Corp.
Ameriprise Financial, Inc.
Ares Capital Corporation
Ares Management, L.P.
ARMOUR Residential REIT, Inc.
E*TRADE Financial Corporation
Eaton Vance Corp.
Fortress Investment Group LLC
Franklin Resources, Inc.
Invesco Ltd.
KKR & Co. L.P.
Lazard Ltd
Legg Mason, Inc.
Leucadia National Corporation
New Residential Investment Corp.
Northern Trust Corporation
Raymond James Financial, Inc.
Starwood Property Trust, Inc.
T. Rowe Price Group, Inc.
TD Ameritrade Holding Corporation
The Blackstone Group L.P.
The Carlyle Group L.P.
Waddell & Reed Financial, Inc.