Annual Report - CoBank

Senior Officers Compensation Discussion and AnalysisCoBank, ACBExecutive Retirement PlanAs noted previously, an ERP has been adopted for the President and CEO and one of the other senior officers subject to theirrespective employment agreements. The President and CEO’s agreement provides for a minimum retirement benefit of 41 percent ofeligible compensation as of December 31, 2011, increasing to a maximum of 55 percent of eligible compensation as of December 31,2015, with no reduction for early retirement. The ERP is limited such that benefits provided under that plan are payable only if totalretirement benefits payable per year from the three retirement plans do not exceed $850,000, expressed as a single life annuity withfive years certain. The ERP is integrated with the existing final average pay defined benefit retirement plan and the existing SERP. Itprovides the required additional retirement benefits to the extent such benefits are not covered by the other two plans, but only up tothe maximum total retirement benefits noted above. If benefits exceed this maximum, no benefits are payable from the ERP. In theevent of the death of the President and CEO during the term of his employment with the Bank, the plan provides a death benefit to asurviving spouse equal to the minimum retirement benefit described above. The benefits provided to the other senior officer under theERP are the same as those provided to the President and CEO, but at reduced levels.Nonqualified Deferred Compensation PlanWe have a nonqualified deferred compensation plan that allows senior officers and other eligible senior managers to defer all or aportion of their incentive compensation. Additionally, the Bank makes contributions to this plan on behalf of participants whosebenefits under the 401(k) plan are limited due to federal tax laws. Contributions are made at the same percentages as available underthe 401(k) plan. The compensation that is deferred is invested in any number of investment alternatives selected by the participants.These alternatives are either identical or substantially similar to those available to all participants in the Bank’s 401(k) plan. Theparticipant is subject to all risks and returns of amounts invested. The election to defer is irrevocable and the deferred amounts cannotbe paid except in accordance with specified elections as permitted by law. At that time, the participant will receive payment of theamounts credited to his or her account under the plan in a manner that has been specified by the participant. If a participant dies beforethe entire amount has been distributed, the undistributed portion will be paid to the participant’s beneficiary.Risk ReviewThe Committee considers potential risks when reviewing and approving compensation programs. The Board of Directorsapproves the total compensation program to ensure there is a proper balance and alignment between the overall acceptable risk profileof the Bank and the manner in which prudent risk taking is reflected in the design of the underlying program. We have designed ourtotal compensation program, including our incentive compensation plans, with specific features to address potential risks whilerewarding employees for achieving short-term and long-term financial and strategic objectives through prudent business judgment andappropriate risk taking. The objective is to motivate employees to take prudent risk within Board-approved parameters while ensuringemployees are also accountable for the long-term outcomes of their actions. The following elements have been incorporated in ourcompensation programs available for our senior officers:A Balanced Mix of Compensation Components – The target compensation mix for our senior officers is composed of salary,short-term incentive, long-term incentive and retirement benefits, representing a mix that is weighted toward long-termperformance and service with CoBank.Multiple Performance Factors – Our incentive compensation plans use both bankwide metrics and individual performance, whichencourage focus on the achievement of objectives for the overall benefit of the Bank, in addition to a Board-determinedevaluation of our strategic objectives.ooooThe short-term incentive is dependent on multiple performance metrics, including a subjective measure of performanceagainst strategic business objectives and an assessment of individual performanceThe long-term incentives are cash-based, with a three-year performance and vesting period to complement our annualshort-term incentivesBoard of Directors retains the right to adjust performance factorsTargets and ranges of performance for each metric are approved by the Board prior to the beginning of the performanceperiodCoBank 2011 Annual Report135