Why Annaly Capital Management's Executives Don't Care How the Company Performs

The coup at Annaly Capital Management (NYSE: NLY  ) is now complete. On Wednesday, the company filed its annual proxy statement containing information about upcoming shareholder votes, the composition of its board, and the compensation of its executives, among other things.

The only catch is that following Annaly Capital Management's corporate reorganization in 2013, it no longer has to provide the latter. For shareholders who care about how and how much the company's executives get paid, they'll have to be satisfied with this:

As a result of an externalization transaction, we are managed by Annaly Management Company LLC, or the Manager. We pay the Manager a management fee of 1.05% of our stockholders' equity (as defined in the management agreement), and it pays all of the compensation to our named executive officers and its employees. While some of our employees remain employed by our subsidiaries for regulatory or corporate efficiency reasons, all compensation expenses related to such personnel reduce the management fee we pay to the Manager.

If you haven't followed the latest developments, here's the quick and dirty version. Last year, the mortgage REIT's executives formed a separate and privately owned LLC called Annaly Management Company, which, following a shareholder vote, took over the management responsibilities of Annaly Capital Management.

The latter's executives then resigned their positions at the publicly traded company and assumed the same roles at the privately owned one. When all was said and done, in turn, the same people are running Annaly Capital Management, but are now doing so from behind the impenetrable veneer of a private LLC -- which, it's worth noting, the executives own in its entirety.

The net result is twofold. In the first case, Annaly Capital Management no longer has to disclose how much it pays its executives. This will come as a great relief to them, as their exorbitant pay packages have been a serious issue of contention for many years now. And in the second case, the overall compensation levels are now fixed at 1.05% of stockholders' equity, which equates to around $130 million.

Compared with previous years, this may seem like a bargain, as it's vastly less than the $200 million paid out in compensation in 2011. But it's important to note that this appears to have less to do with the reorganization and more to do with the fact that a number of the company's highest paid executives no longer work there.

Founder and former-CEO Michael Farrell, who earned $36 million in 2011, passed away last year. Former CFO Kathryn Fagan, who earned $14 million that year, also recently left the company. And former COO James Fortescue, who earned $7 million in 2011, is gone, too. Add those up, and there's your savings.

Additionally, the now-fixed management fee precludes Annaly Capital Management's ability from giving incentives for exceptional performance. And the flipside is that Annaly's managers now get their exorbitant compensation packages regardless of how the company performs.

Needless to say, this is an amazing deal for Annaly's titular executives and a horrible one for its current shareholders.

The 9-minute dividend strategy better than mREITs
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top income analyst put together a report outlining a simple 9-minutes-a-year dividend strategy that should be in every income investor’s toolkit. To learn more about this "tax-skipping" dividend trick, all you have to do is click here now.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2909425, ~/Articles/ArticleHandler.aspx, 10/23/2014 7:08:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement