Government regulators will cut sharply the pay of the executives they hire to succeed the departing heads of Fannie Mae and Freddie Mac, said regulators, which may make it difficult for the struggling mortgage-finance giants to attract and keep qualified chief executives.
Freddie Mac is considering total compensation in the range of $250,000 to $500,000 annually for its new CEO, according to people familiar with the matter. Some officials even have floated the idea of paying a salary of $1.
Whatever ultimate pay arrangement is approved by regulators for Freddie could set a precedent that would be adopted by Fannie.
The moves would mark an about-face from the pay packages given to the departing CEOs, who stood to make as much as $6 million in salary and deferred and incentive pay last year. The base salary for the posts was $900,000.
The Fannie and Freddie boards and their regulator, the Federal Housing Finance Agency, set those compensation packages in 2009 in consultation with Treasury Department officials.
An FHFA spokeswoman wouldn't comment on the possible pay of the new Freddie Mac chief executive but said last week the agency "anticipates a substantial decrease in CEO compensation" when new executives are hired. The FHFA also has kept in place for a second year a freeze on annual salaries for all employees at the two companies.
Executive pay at Fannie and Freddie caused an uproar last fall as the companies continued to report huge losses. A House panel voted by a 52-4 margin to put the companies on federal pay scales, which would cut pay both for executives and rank-and-file employees. The bill hasn't received a full floor vote.
The FHFA has defended the current pay packages as appropriate given the technical expertise needed to oversee two companies that guarantee $5 trillion in mortgages and the fact the executives couldn't be paid in the companies' stock, which essentially is worthless.
"Taxpayers…would not be better off if we provoke a rapid turnover of senior management by further slashing compensation," said Edward DeMarco, the FHFA's acting director, at a November hearing.
Fannie CEO Michael Williams announced last week his plans to step down as soon as the Fannie board finds a successor. His Freddie counterpart, Charles E. Haldeman Jr., announced his decision last October and said he would depart sometime in 2012; he still is in his post. Both executives took their jobs in 2009, less than a year after the government took over the companies after the housing market crashed.
Messrs. Haldeman and Williams didn't cite any single reason for leaving and have said the decisions and timings were theirs alone.
Despite significant efforts to stabilize the companies after their dramatic 2008 takeovers, the companies still face heavy scrutiny from Congress and other regulators. Uncertainty over their future has contributed to a steady stream of executive departures over the past year.
Administration officials last February released a "white paper" that said the companies eventually should be closed but have offered few details about what should take their places. Mr. Haldeman said at an industry conference in October that the uncertainty over Freddie's future was having a "really negative impact on the morale at the company."
Unlike other companies that received substantial federal aid, such as Citigroup Inc. and American International Group Inc., executives of Fannie and Freddie don't have the chance to lead the operations back to profitability, due in part to dividend payments they must return to the Treasury every quarter. The executives also must cede major business decisions to their regulator, the Treasury or Congress.
"These are challenging jobs to fill, especially if you don't know what kind of CEO you're recruiting," said David Stevens, president of the Mortgage Bankers Association. "Do you want a visionary, profit-maximizing CEO? A controller-slash-accountant who can manage the effective wind down? An academic who can altruistically guide the institution to help the housing market?" The reduced pay further "shrinks the pool of potential candidates," said Mr. Stevens.
The executive pay cuts figure to turn the posts into largely public-service jobs given the pay scales for comparable financial-services positions. Herb Allison, who was installed by the Bush administration to run Fannie in September 2008, worked without a salary or bonus until leaving for the Treasury Department in April 2009.
It isn't clear whether the cuts in CEO pay would affect other senior executives who have packages worth more than $1 million annually. People familiar with the deliberations said reducing CEO pay could defuse the compensation controversy, making it easier to maintain competitive, market-rate salaries for a handful of other senior executives.
Fannie and Freddie are still losing money from mortgages they backed as the housing boom turned to bust. The weak housing market also has sparked a debate over whether Fannie and Freddie should tolerate more mortgage losses to help spur a recovery, a view endorsed by many Democrats and officials at the Federal Reserve. Many Republicans have opposed such a move.
While Congress and the White House have agreed on little concerning the ultimate end game for Fannie and Freddie, legislation approved last month will increase the fees the companies charge lenders over the next 10 years to pay for a two-month extension of a cut in the U.S. payroll tax.
This story first appeared on WSJ.com.
Write to Nick Timiraos at nick.timiraos@wsj.com
- Bull/Bear Report - Hirings, firings, rising stars and downward spiral of the finance job market
- Get the job: From writing resumes to negotiating the offer, all the tools to land the perfect finance job
- Morning Coffee: Sign up for the latest in finance career news
- FINS.com: Finance jobs, research and career news by FINS from The Wall Street Journal