PROPOSAL

02

 

Advisory Approval of Executive Compensation

The Board is committed to corporate governance best practices and recognizes the significant interest of stockholders in executive compensation matters. The Company is providing this non-binding advisory vote pursuant to Section 14A of the Exchange Act.

As described in detail under the headings “Management Structure” and “Compensation Paid by the Manager to the Named Executive Officers” above and “Compensation Discussion and Analysis” below, the Company is externally-managed by the Manager pursuant to the Management Agreement between the Manager and the Company. The Manager is responsible for paying all compensation expense associated with managing the Company and its subsidiaries. The Company pays the Manager a management fee, and the Manager uses the proceeds from the management fee 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 it reimburse the Manager for the cost of such compensation. The Manager makes all decisions relating to the compensation of the NEOs based on the factors the Manager determines to be appropriate, including both individual and Company performance, and subject to the terms of any employment agreement entered into between the Manager and an individual NEO.

The NEOs are eligible to receive equity awards pursuant to the Company’s equity incentive plan, which is administered by the Compensation Committee. No equity awards were made to any of the NEOs in 2017. In 2017, the Company did not pay any compensation to the 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 related narrative discussion, is hereby APPROVED.”

While this vote is advisory and non-binding, the Board and Compensation Committee value the views of the Company’s stockholders and will consider the voting results when making compensation decisions regarding the Company’s equity incentive plans.

   
 The Board recommends a vote FOR the Approval of this Resolution.

COMPENSATION DISCUSSION AND ANALYSIS

As discussed above, the Manager pays all of the compensation, including benefits, to its employees (including the NEOs other than Mr. Keyes). Although certain personnel (but none of the NEOs) are employed by the Company’s subsidiaries for regulatory or corporate efficiency reasons, all compensation and benefits paid to such personnel by the Company’s subsidiaries reduce, on a dollar-for-dollar basis, the management fee the Company pays to the Manager. The proceeds of the management fee are used 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 it reimburse the Manager for the cost of such compensation.

Accordingly, the Company did not pay any cash compensation to the NEOs, nor did the Company grant them any plan-based awards, for 2017. The Company does not provide the NEOs with pension benefits, perquisites or other personal benefits. The Company is not party to any employment agreements entered into between the Manager and individual NEOs, and it does 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, the Company pays the Manager a monthly management fee equal to 1/12th of 1.05% of the Company’s stockholders’ equity, as defined in the Management Agreement, for its management services, which was approximately $164.3 million during the year ended December 31, 2017.

The 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 the NEOs. The 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. The Manager compensates its employees (including the NEOs) for a variety of services performed for the benefit of the Manager. Thus, the compensation paid by the 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

At the Company’s 2017 Annual Meeting, 69% of the votes cast supported the Company’s 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 and the Company redoubled its engagement efforts in order to understand the information stockholders need to evaluate the alignment between NEO pay and Company performance. These efforts included:

  • Outreach to investors representing approximately 72% of shares held by institutional stockholders, including 92% of the Company’s 50 largest stockholders and 96% of the Company’s 25 largest stockholders

  • 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, the Company identified that certain stockholders and other key stakeholders would like the Company to disclose the magnitude of NEO compensation and the proportion of variable NEO pay to facilitate an informed evaluation of the Manager’s executive compensation program. In order to address these concerns, the Manager has provided the Company with detailed quantitative information about its executive compensation program for inclusion in this Proxy Statement. For additional details, please see “Compensation Paid by the Manager to the Named Executive Officers – 2018 Changes” above.

The Company and the Board 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/Commitments

Position   Number of
Individuals
  Annaly Stock Ownership
Guideline/Commitment
  Timeframe to Meet
Guideline/Commitment
Chief Executive Officer(1)   1   $15,000,000   July 2020
Other Operating Committee Members(2)   9   30% of Annual Total Compensation   5 years
Managing Directors   23   20% of Annual Total Compensation   5 years
Director-Level Employees   28   10% of Annual Total Compensation   5 years
Total   61        
  1. In July 2017, Mr. Keyes voluntarily committed to increase his stock ownership position beyond his Board-approved ownership guideline of $10 million. Mr. Keyes has pledged to meet his enhanced $15 million commitment solely through additional open market purchases of the Company’s common stock.

  2. In July 2017, other members of senior management (including the CIO, CCO, CFO and CLO) voluntarily committed to increase their stock ownership positions beyond the guideline of 30% of annual total compensation adopted by the Board. Like Mr. Keyes, these officers have agreed to achieve their increased stock ownership commitments by July 2020 solely through open market purchases of the Company’s common stock.

These stock ownership guidelines apply to more than 40% of the 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.

Stock Holding Period

Under a policy adopted by the Compensation Committee in 2016, the Manager’s employees (including the 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

The Company has a policy prohibiting the Manager’s employees (including the executive officers) from engaging in any hedging transactions with respect to Company 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 Company securities.

Prohibition on Pledging Company Securities

The Company has a policy prohibiting the Manager’s employees (including the 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 “Management Structure,” the Compensation Committee is not entitled to approve compensation decisions made by the Manager and the 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 the 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 2017, 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 the Company.

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)   Jonathan D. Green   E. Wayne Nordberg   John H. Schaefer   Vicki Williams