Now We have Teeth—Additional Restrictions on Executive Compensation Under TARP

February 2, 2009 at 3:38 pm Leave a comment

On February 4, 2009, the Treasury Department amended its executive compensation restrictions for financial institutions receiving “exceptional assistance” prompted by the current economic crisis and proposed additional restrictions for participants in generally available capital access programs. The new administration made clear that it wants to remove the opportunity for executives participating in these programs from benefiting personally. “Exceptional assistance” and “generally available capital access programs” are discussed below.

Material changes are as follows:

  • Compliance and Certification. Each CEO of any institution receiving government bailout funds must certify that the institution has strictly complied with statutory, Treasury, and contractual executive compensation restrictions. Each compensation committee must also provide an explanation of how compensation arrangements do not encourage excessive and unnecessary risk.
  • Institutions Receiving “Exceptional Assistance.” Institutions receiving “exceptional assistance” are now retroactively subject to the following additional restrictions:
    • $500,000 cap on each senior executive’s total compensation, instead of merely a tax deduction limit;
    • The only other allowed compensation for senior executives is restricted stock or similar long term incentive plans which limit vesting until after: (a) full repayment to the government or (b) a waiting period taking into account repayment and the interests of taxpayers;
    • Executive compensation structure and strategy must be fully disclosed and is subject to non-binding “say on pay” shareholder resolutions;
    • Now mandatory clawback of bonuses includes top 25 senior executives (rather than top five) who knowingly participated in providing inaccurate (a) information relating to financial statements or (b) performance metrics used to calculate their own incentive pay;
    • Golden parachute ban applies to the top 10 senior executives (rather than top five) and the next 25 executives cannot receive severance of more than one year’s compensation; and
    • The Board must adopt a company-wide policy on luxury expenditures, such as aviation services, entertainment and holiday parties, or conferences, and require certification by the CEO for expenditures that may be viewed as excessive or luxury.
  • Proposed Restrictions for Participants in Generally Available Capital Access Programs. Additionally, the Treasury intends to issue new restrictions for institutions participating in “generally available capital access programs.” The proposed changes, which will not apply retroactively to existing investments or programs already announced, are similar to those in effect for institutions receiving “exceptional assistance.”
  • Long-Term Regulatory Reform: Compensation Strategies Aligned with Proper Risk Management and Long-Term Value and Growth. Finally, the Treasury is reviewing measures to move regulations beyond those that regulate compensation strategies related only to top executives to regulations focused on how company-wide compensation strategies encourage excessive risk-taking.
  • Exceptional Assistance Versus Generally Available Capital Access Programs
    • Institutions that participate in “exceptional assistance” programs are those that need more assistance than the general programs provide. Some examples of these institutions are AIG, Bank of America and Citigroup.
    • Institutions that participate in “generally available capital access programs” are not entitled to special terms, but receive assistance based on terms available to all recipients, including the terms regarding limitations on the amount received and repayment. An example of this type of program is the Capital Purchase Program.

To read the official press release on these changes, please click here.

Entry filed under: Client Alerts, Executive Compensation, TARP.

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