Posts filed under ‘Executive Compensation’

Final Guidance on Incentive Compensation Includes Small Banks

               On June 21, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Office of Thrift Supervision (the “Agencies”) issued final Guidance on Sound Incentive Compensation Policies.  The guidance is designed to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with safety and soundness.

Application to Smaller Banking Organizations

            Although the proposed guidance only applied to banking organizations supervised by the Federal Reserve, the final guidance applies to all banking organizations supervised by the Agencies.  However, the final guidance is expected to have less impact on smaller banking organizations, which, unlike their larger counterparts, may not need to implement systematic and formalized policies, procedures and processes.  Whether or not an organization is considered “large” is determined under the relevant agency’s standard.  The guidance permits flexibility for customized arrangements.


            The guidance applies to senior executives and other employees who, either individually or as part of a group, have the ability to expose the baking organization to material amounts of risk.  “Senior executives” includes, at a minimum, “executive officers” within the meaning of Federal Reserve Regulation O (12 C.F.R. § 215.2(e)(1)) and, for publically traded companies, “named officers” within the meaning of the Securities and Exchange Commission’s rules on the disclosure of executive compensation (17 C.F.R. § 229.402(a)(3)).

Key Principles

            The final guidance embodies the same three key principals as the proposed guidance:

  1. Incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk;
  2. These arrangements should be compatible with effective controls and risk-management;
  3. These arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

More Information

            The final guidance will be effective on the date of its publication in the Federal Register.  A complete copy of the final guidance can be found here.

June 23, 2010 at 9:13 pm Leave a comment

Loan Officers Eligible for Overtime Pay

On March 24, the Department of Labor (DOL) issued an Administrator’s Interpretation concluding that the typical mortgage loan officer does not qualify under the administrative employee exemption to the Fair Labor Standards Act’s overtime requirements and, thus, is eligible for overtime pay.  To fall within the exemption, the employee’s primary duty must be related to the management or general business operations.  The DOL’s conclusion is based on the finding that a typical mortgage loan officer’s primary duty is making sales of loan products.  Such duty involves the production work of their financial institution employers and is unrelated to the internal management or general business operations of the institutions.   

A complete copy of the Administrator’s Interpretation can be found here.

April 2, 2010 at 8:54 pm Leave a comment

President Announces Community Bank Program to Increase Credit Flow to Small Businesses

The President announced plans today that, if put into action, would lead to the realization of at least some much-needed and long-sought-after assistance for community banks.  A copy of the President’s announcement is available here. (Skip to Page 2 for Details).

According to the President’s proposal, which is part of the White House’s “Financial Stability Plan,” the program would target small business lending, but would also offer a mechanism for banks with less than $1 billion in assets to access capital with an annual dividend rate of 3%.  The announcement is short on specifics, but here are the basics:

(1) Banks will receive capital in an amount equaling up to 2% of risk-weighted assets; 

(2) The annual dividends on the capital will equal 3% for the first five years and 9% thereafter; and 

(3) Banks seeking to participate in the program will submit a “small business lending plan” in which the bank explains how additional capital will help increase its lending to small businesses.  (Banks approved for the program that elect to participate will also be required to follow up with quarterly reports detailing small business activities).

Over the next few weeks, Treasury will work with community banks and the small business community to hammer out the program’s specifics.  Notably, the release contemplates that banks already participating in the capital purchase program will be able to replace existing capital, which carries a 5% dividend (7.7% for S-Corps), with investments under the new program.   

 The President also announced support for legislation that would increase the size of key Small Business Administration (SBA) loans. The aim of the increase would (supposedly) allow the SBA to ensure that more small businesses can get access to credit.

 The first prong of the proposed legislation would increase the Maximum 7(a) loan from $2 million to $5 million, providing greater access to capital that businesses could use to boost working capital as well as purchase machinery equipment and real estate.  

The second prong of the proposed legislation would increase the maximum 504 project loan from $2 million to $5 million for standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5 million for manufacturers (supporting a total project of $13.75 million), thereby increasing the qualifying borrowers’ ability to undertake larger projects.

And the third prong of the proposed legislation would increase the maximum loan size of the SBA microloan programs from $35,000 to $50,000.

October 21, 2009 at 10:11 pm Leave a comment

Treasury Releases Executive Compensation Restrictions for TARP Participants

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.

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

Economic Stimulus Legislation Adds to Executive Compensation Restrictions for TARP Participants

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA).  While many aspects of this “stimulus” legislation have been debated publicly for weeks, new executive compensation restrictions for financial institutions participating in the Troubled Asset Relief Program (TARP) were inserted just one day before the final congressional vote took place.  Unlike the Secretary of Treasury’s February 4th revisions to the TARP executive compensation rules, which are not retroactive, these new executive compensation restrictions will apply to all TARP participants, including those that have already received funding under TARP.  Here is a brief overview of these new restrictions.  

Restrictions on Golden Parachute Payments. ARRA bans any “golden parachute payment” to a TARP participant’s senior executive officers or any of the institution’s next five most highly-compensated employees for the entire period in which Treasury holds the institution’s preferred shares.  ARRA defines “golden parachute payment” broadly, covering any payment for departure from an institution for any reason, except for payments for services performed or benefits accrued.

This provision clearly targets the handsome severance packages received by chief executives at large, failing financial institutions.  Unfortunately, the law does not distinguish between such packages and standard retirement packages received by most workers in the broader economy.  Hopefully, in his rules implementing this provision, the Secretary of the Treasury will provide for such a distinction in his interpretation of the exception for “services performed or benefits accrued.”

Restrictions on Incentive Compensation.  Employees subject to ARRA’s incentive compensation restrictions will be banned from receiving or accruing any bonus, retention award or incentive compensation, other than long-term restricted stock (in an amount that does not exceed 1/3 of the executive’s total annual compensation and does not fully vest until the government is repaid) for as long as the U.S. Treasury holds preferred shares of his or her employer.  (more…)

February 20, 2009 at 4:58 pm Leave a comment

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