A “bird in hand” for MFA Financial exec…

June 11, 2010

Earlier this week, MFA Financial, Inc. (MFA), a real estate investment trust that invests in residential mortgage-backed securities (on a leveraged basis, its website notes), amended the employment agreement with Stewart Zimmerman, its Chairman of the Board/CEO. The agreement itself was attached to this 8-K.

Zimmerman’s prior agreement was set to expire December 31, 2010, so he and the company didn—t have to rush to extend its terms. But by reaching an agreement now, it’s likely that he—ll be with the company until the end of 2012.

There won—t be any change right away in Zimmerman’s salary; he—ll continue to earn the $900,000 base salary that the company’s April 2010 proxy shows he has been paid since at least 2007. He—ll also get an annual stock grant with a fair market value of $100,000.

The big money will come in the form of a performance bonus, the structure of which seems rather counter-intuitive to us. The bonus pool in question — which is for senior executives only — will be based on MFA’s Return on Average Equity (see Exhibit A/p. 17 of Zimmerman’s agreement). The bonus pays both cash and stock, which is common, but in this order:

“…(i) Bonus Pool (as adjusted) up to $2,700,000: seventy-five percent (75%) will be paid in cash and twenty-five (25%) percent will be paid in restricted stock; (ii) the incremental total Bonus Pool (as adjusted) between $2,700,000 and $4,050,000: sixty-five percent (65%) will be paid in cash and thirty-five percent (35%) will be paid in restricted stock; (iii) the incremental total Bonus Pool (as adjusted) in excess of $4,050,000: fifty percent (50%) will be paid in cash and fifty percent (50%) will be paid in restricted stock.”

The stock grants are straightforward: The restrictions will lapse gradually over time, and — if Zimmerman stays until December 31, 2012 — all of his shares will fully vest.

However, it seems unusual to pay a higher percentage of cash at the low end of the bonus pool, since presumably most people would rather have the proverbial —bird in the hand (more cash) now.

Of course, a smaller percentage of a higher number (from the middle or high tiers of the bonus pool formula, above) would still put more money in Zimmerman’s portfolio. But by giving the senior executives more cash up front, one could question whether the company has successfully written an incentive plan that successfully aligns the interests of the senior executives with the interests of its shareholders.

Image source: Dave_S via Flickr

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