Pub. 2 2013 Issue 2

February/March 2013 27 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s BERT ELY’S SHEDDING LIGHT ON THE FARM CREDIT SYSTEM, AMERICA’S LEAST KNOWN GSE ©2013 Bert Ely FCS in revolt against FCA I NTREPID READERS MAY REMEMBER MY REPORT IN THE October 2012 FCWabout opposition within the FCS to a proposed Farm Credit Administration (FCA) rule directing FCS institutions to hold advisory “say on pay” votes for their borrower/stockholders on senior officer compensation. In effect, borrower/ stockholders would be asked their opinion about officer compensation “when 5 percent of the voting stockholders petition for the vote.” This rule also would require FCS institutions to “hold a vote on chief executive officer (CEO) compensation, senior officer compensation, or both if compensation increases by 15 percent or more from the previous reporting period.” To say that the management of FCS institutions (officers and directors) opposed this rule is an understatement – there was universal opposition to it. To its credit the FCA adopted the rule. One reason for that opposition – the readily observable fact that compensation packages for FCS CEOs often take a sizeable jump (in effect, severance pay) in the year they retire or if their institution is acquired by another FCS institution. FCS insiders have not accepted this defeat quietly. Using a rarely utilized provision in federal law (“Interested parties have the right to petition a federal agency to issue, amend, or repeal regulations”), the FCS trade association, the Farm Credit Council (Council), petitioned the FCA to repeal its advisory “say on pay” rule earlier this month. The FCA, as required by law, has published this petition and has requested public comment. FCS comments on it undoubtedly will be entertaining. The Council’s rationale for a repeal of “say on pay” is most interesting: “This requirement directly undermines the FCA supported concept of incentive compensation programs tied to performance. . . . Requiring ‘say on pay’ votes when incentive compensation plans operate as in- tended – by reducing pay when performance does not meet standard and then rewarding recovery – is inconsistent with creating the optimum incentives for performance that excels. The rule is a precedent setting change that involves shareholders directly in the management of their institution.” What the Council and FCS insiders seem not to understand is that shareholders – the owners of FCS institutions – may not like the results incentive compensation plans produce, such as when a retiring executive gets a huge payout. Since FCS borrowers usually are FCS shareholders, they should at least have the opportunity to opine on FCS executive compensation through “say on pay.” Perhaps unintentionally, the Council made a plea for its members – FCS institutions – to become more transparent to their borrower/ stockholders with this statement in its petition: “Shareholders simply do not have access to the wealth of information provided directors in general, and the compensation committee in particular, to make informed continued on page 28