DEFA14A: Annaly Capital Management Seeks Stockholder Support for Executive Compensation Plan

Annaly Capital Management is seeking stockholder approval for its executive compensation plan, highlighting its alignment with company performance and stockholder interests.

Summary

• Annaly Capital Management is seeking stockholder support for its executive compensation (Say-on-Pay) vote at the annual meeting on May 15, 2024.
• The company's compensation program is designed to incentivize performance while managing risk and liquidity.
• In 2022, executive incentive awards were reduced despite above-target scorecard performance due to negative Total Stockholder Return (TSR).
• For 2023, the company refined its annual incentive framework by increasing the weighting of Relative Tangible Economic Return and replacing the TSR governor with an Absolute Tangible Economic Return modifier.
• The Committee back-tested the 2022 pay decisions using the enhanced 2023 framework and noted that the results were consistent with the below-target amounts the Committee actually awarded for 2022 performance.
• For 2023, the company increased the rigor of the annual incentive framework and adjusted the target incentive opportunities for executives.
• CEO David Finkelstein had not received an increase to his total direct compensation since his appointment as CEO in 2020.
• Executives have a maximum incentive award opportunity of 120% of target, which is considered modest compared to peers.
• In 2023, Annaly delivered strong performance, including Absolute Tangible Economic Return of 6% and Relative Tangible Economic Return of 86%.
• Company performance against the corporate scorecard resulted in achievement of 105.8% of target for 2023.
• Each executive earned an overall incentive payout of 104.4% of target.
• The company acknowledges the challenges of constructing an appropriate peer group due to its size and complexity.
• For 2024, the company will increase the minimum performance threshold required to receive a payout under the scorecard and also eliminate the scaling factor used to calculate overall scores.
• The company is committed to continuous improvement and will engage with stockholders to enhance the transparency and pay-for-performance nature of its compensation program.

Sentiment

Score: 7

Explanation: The document presents a balanced view of the company's compensation practices, highlighting both positive performance and areas for improvement. The company's commitment to continuous improvement and engagement with stockholders is a positive sign.

Positives

• The compensation program is designed to incentivize and reward superior performance for the benefit of stockholders.
• The company delivered strong performance in 2023, including Absolute Tangible Economic Return of 6% and Relative Tangible Economic Return of 86%.
• The Committee believes that the payouts are appropriate and well-aligned with stockholder value.
• The company is committed to continuous improvement and will engage with stockholders to enhance the transparency and pay-for-performance nature of its compensation program.
• For 2024, the Committee has committed not to increase the executives target incentive opportunities from their 2023 levels.

Negatives

• In 2022, the company experienced negative TSR, leading to a reduction in executive incentive awards despite above-target scorecard performance.
• The company acknowledges the challenges of constructing an appropriate peer group due to its size and complexity.

Risks

• Sustained market volatility could impact the company's performance and ability to achieve its financial goals.
• The complexity of the corporate scorecard could lead to confusion or misinterpretation by stockholders.
• The company's reliance on a peer group that includes smaller mREITs and larger financial services companies could result in inappropriate compensation benchmarks.

Future Outlook

The company is committed to continuous improvement of its executive compensation program and will engage with stockholders to enhance its transparency and pay-for-performance nature. For 2024, the Committee will increase the minimum performance threshold required to receive a payout under the scorecard and also eliminate the scaling factor used to calculate overall scores.

Management Comments

• The cornerstone of the Committee's compensation philosophy is to incentivize and reward superior performance for the benefit of our stockholders, while also managing risk and liquidity.
• The Committee believes that these payouts are appropriate and well-aligned with stockholder value.
• The Committee believes that our current executive compensation program is appropriately structured and sized, but as always, we are committed to continuous improvement that better aligns pay with performance.

Industry Context

Annaly Capital Management operates in the mortgage REIT (mREIT) sector, which is sensitive to interest rate fluctuations and market volatility. The company's compensation practices are being evaluated in the context of its performance relative to its peers and the broader financial services industry.

Comparison to Industry Standards

• Annaly is the largest mortgage REIT (mREIT) in the world, with a market cap 12x the average mREIT peer.
• The company's peer group includes AGNC Investment Corp., ARMOUR Residential REIT, Inc., Invesco Mortgage Capital, Inc. and Orchid Island Capital, Inc. (agency peers) and Chimera Investment Corporation, Dynex Capital, Inc., Ellington Financial Inc., MFA Financial, Inc., New York Mortgage Trust, Redwood Trust, Inc., Two Harbors Investment Corp. and, for 2023, Rithm Capital Corp. (credit peers).
• The company notes that its executives have a maximum incentive award opportunity of 120% of target, which is modestly set compared to peers and the broader market, where payout opportunities often cap out at 150% or even 200% of target.

Stakeholder Impact

• The company's compensation program is designed to incentivize performance for the benefit of stockholders.
• The company's commitment to continuous improvement and engagement with stockholders is intended to enhance the transparency and pay-for-performance nature of its compensation program.

Next Steps

• Stockholders are asked to vote on the Say-on-Pay proposal at the annual meeting on May 15, 2024.
• The company plans to engage with stockholders to carefully consider whether additional simplifications, clarifications or other enhancements could bolster the transparency, integrity and pay-for-performance nature of our compensation program.

Key Dates

Keywords

executive compensation, say-on-pay, Annaly Capital Management, incentive program, tangible economic return, stockholder value, peer group, corporate scorecard, performance, mREIT