Treasury Releases Executive Compensation Restrictions for TARP Participants

June 12, 2009 at 4:23 pm Leave a comment

The U.S. Treasury Department has released an Interim Final Rule (the Executive Compensation Rule) establishing governance and compensation standards for institutions participating in the Troubled Asset Relief Program (TARP).  Any institution participating in the TARP Capital Purchase Program is subject to these rules so long as any obligation to Treasury remains outstanding.  Review the press release announcing the IFR, and review the entire IFR.

Some of the IFR’s most important provisions include the following: 

  • Limitations on the amounts and types of bonuses payable to senior executive officers and other highly compensated employees.
  • A ban on golden parachute payments—a term that reaches much farther than most people think, including almost any type of compensation received upon a covered employee’s departure from the institution.
  • A “clawback” provision that requires an institution to recover any bonus, retention award or incentive compensation paid to a covered employee if the bonus, retention award or incentive compensation was paid in reliance on inaccurate financial information.   
  • Several corporate governance and board certification requirements, including a requirement for perquisite disclosures and for implementing luxury expense controls.       
  • A requirement for all TARP participants to provide shareholders with an annual, non-binding vote on the compensation of the institution’s executives.   
  • An affirmation that the rule’s restrictions will not apply to institutions receiving indirect financial assistance from UST, such as institutions receiving loans from the Term Asset Loan Facility.

If your institution is currently participating in any TARP program, you are required to comply with these rules. The following initial steps should help:

  • Identify which of your employees will be subject to which restrictions.  The number of employees covered by a given restriction varies depending on the type of restriction and the amount of Capital Purchase Program funding the institution has received.
  • Review your institution’s employment and other compensation-based agreements, especially severance provisions, to verify that they comply with the IFR.  
  • Designate appropriate board committees to confer with the institution’s senior risk officers to identify compensation policies that may encourage unnecessary risk taking.

Entry filed under: Capital Purchase Programs, Client Alerts, Executive Compensation, TARP.

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