Annual Report - CoBank

Senior Officers Compensation Discussion and AnalysisCoBank, ACBThe actual long-term incentive awards for 2011, 2010 and 2009 for the President and CEO and other senior officers are presentedin the Summary Compensation Table on page 137.Terms of Senior Officers’ Employment AgreementsAs of December 31, 2011, two of our senior officers, including the President and CEO, are employed pursuant to employmentagreements, which provide specified compensation and related benefits to these senior officers in the event their employment isterminated, except for termination for cause. In the event of termination except for cause, the employment agreements provide for (a)payment of the officer’s prorated salary and incentives through the date of the termination, (b) semi-monthly payments aggregatingtwo to three times the sum of the officer’s base compensation and short-term incentives at target, (c) enhanced retirement benefits ifthe termination results from a change in control, (d) the continued participation in the Bank’s health and welfare benefits over a two orthree year period, and (e) certain other benefits over a two or three year period to the same extent as such benefits were being providedon the date of termination. The employment agreements also provide certain limited payments upon death or disability of the officer.To receive payments and other benefits under the agreements, the officer must sign a release agreeing to give up any claims, actions orlawsuits against the Bank that relate to his or her employment with the Bank. The agreements also provide for non-competition andnon-solicitation by the officers over the term of the payments, and the payments are considered taxable income, without anyconsideration or provision for “gross-up” for tax purposes.Retirement BenefitsOverviewWe have employer-funded qualified defined benefit pension plans, which are noncontributory and cover employees hired prior toJanuary 1, 2007. Depending on the date of hire, benefits are determined either by a formula based on years of service and final averagepay, or by the accumulation of a cash balance with interest credits and contribution credits based on years of service and eligiblecompensation. We also have a noncontributory, unfunded, nonqualified supplemental executive retirement plan (SERP) covering allbut two senior officers employed at December 31, 2011, as well as specified other senior managers. In addition, as more fullydiscussed below, we have a noncontributory, unfunded nonqualified executive retirement plan (ERP) designed to provide enhancedretirement benefits to the two senior officers employed pursuant to employment agreements, including the President and CEO. Allemployees are also eligible to participate in a 401(k) retirement savings plan, which includes employer matching contributions.Employees hired on or after January 1, 2007, receive additional, non-elective employer contributions to the 401(k) retirement savingsplan. All retirement-eligible employees, including senior officers, are also currently eligible for other postretirement benefits, whichprimarily include access to health care benefits. Substantially all participants pay the full premiums associated with these otherpostretirement health care benefits.Defined Benefit Pension PlansSenior officers hired prior to January 1, 2007 are participants in the defined benefit pension plan. Pursuant to this plan, thebenefits, including those of the President and CEO, are determined based on years of service and final average pay. Eligiblecompensation, as defined under the final average pay formula, is the highest 60 consecutive-month average, which includes salary andincentive compensation measured over a period of one year or less, but excludes long-term incentive awards, expense reimbursements,taxable fringe benefits, relocation allowance, short- and long-term disability payments, nonqualified deferred compensationdistributions, lump sum vacation payouts and all severance payments. Retirement benefits are calculated assuming payment in theform of a single life annuity with five years certain and retirement at age 65. However, the actual form and timing of payments arebased on participant elections. The plan requires five years of service to become vested. All senior officers participating in the definedbenefit pension plan have been employed for more than five years and, as such, are fully vested in the plan. The benefit formula is thesum of 1.5 percent of eligible compensation up to Social Security covered compensation plus 1.75 percent of eligible compensation inexcess of Social Security covered compensation, multiplied by the years of eligible benefit service. Social Security coveredcompensation is the 35 year average of the Social Security taxable wage bases up to the participant’s Social Security retirement age.Federal laws limit the amount of compensation we may consider when determining benefits payable under the qualified definedbenefit pension plans. We maintain a SERP that pays the excess pension benefits that would have been payable under our qualifieddefined benefit pension plans.CoBank 2011 Annual Report134