OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 1700 G STREET NW WASHINGTON DC 20552 (202) 414-3800 Office of the Director Honorable Cliff Stearns Subcommittee on Commerce, Trade Honorable Janice D. Schakowsky Subcommittee on Commerce, Trade Dear Chairman Stearns and Ranking Member Schakowsky: Thank you for the opportunity to expand upon the information I provided as follow-up to the OFHEO's December 2003 Report of the Special Examination of Freddie Mac contained a detailed description of this Agency's investigation into whether executive compensation tied to Earnings Per Share contributed to the improper accounting and management practices at Freddie Mac. The examination concluded that it did. I believe that it may be most helpful if I summarize those findings now, as well as direct your attention to specific pages (60-66) of the report for additional detail and analysis. (Attachment A) I will also provide a description of Fannie Mae's Earnings Per Share Challenge Grants, a program that raises related questions about potential conflicts that arise when executive compensation is tied to a performance metric that may be improperly influenced by management actions. We are gathering the additional compensation information that you requested for years prior to 2002, and I will provide this to you shortly. Attachment B provides the job titles and position descriptions to accompany the 2002 Freddie Mac compensation table in my letter of February 2, as well as additional information on categories that had not been clearly described. Attachment C provides equivalent information to accompany the Fannie Mae compensation table submitted February 2. Notably, the information contained in the Position Descriptions in Attachments B and C is confidential and proprietary. Report of the Special Examination of Freddie Mac At Freddie Mac, the direct compensation of executive officers includes three key components: base salary, an annual cash bonus, and long term stock incentives. As required by the Enterprise's charter, a significant portion of executive officers' compensation is based on the performance of the Enterprise. During the period the exam focused on, 2000-2002, Freddie Mac established a "target bonus" incentive for each executive, at the beginning of each year. The sum of these target bonuses was known as the target "bonus pool." The overall funding of the bonus pool was determined by how well the Enterprise performed when assessed by metrics such as profitability and strategic positioning. The bonus plan |