February 13, 2009
Authored by: Robert Klingler
Contrary to initial media reports, it currently appears that the majority, but not all, of the executive compensation restrictions for TARP recipients contained in the Senate version have survived the negotiations between the House and the Senate. According to published conference reports (which may be subject to further change until officially approved by the House and the Senate), the following restrictions on Executive Compensation are being included in the Economic Stimulus Legislation.
The new executive compensation restrictions are at last partially offset by an elimination of the three-year holding period before institutions can freely redeem the TARP Capital investment.
A summary of the final terms, as published in the conference reports, as well a note of certain changes from the Senate version, are included below.
Limits on Compensation
For so long as the Treasury holds preferred stock in an institution, the institution may not make a “golden parachute payment” of any amount to a senior executive officer or any of the next five most highly-compensated employees. A “golden parachute payment” is defined as any payment for departure from a company for any reason, except for payments for services performed or benefits accrued.
For so long as the Treasury holds preferred stock in an institution, the institution also many not pay or accrue any bonus, retention award, or incentive compensation, other than long-term restricted stock (with a value in amount that does not exceed 1/3 of the executive’s total annual compensation and that does not fully vest until the government is repaid) to:
- the most highly-compensated employee, for institutions receiving less than $25 million under TARP;
- at least the five most highly-compensated employees, for institutions receiving between $25 million and $250 million under TARP;
- the senior executive officers and at least the ten next most highly-compensated employees, for institutions receiving between $250 million and $500 million; and
- the senior executive officers and at least the 20 next most highly-compensated employees, for institutions receiving larger amounts.
The Treasury Secretary is given the discretion to apply the restrictions on bonus to a larger number of employees for institutions receiving at least $25 million. The bonus restriction does not prohibit the payment of any bonus required to be paid pursuant to a written employment contract executed on or before February 11, 2009.
In perhaps the most significant modification, the final legislation does NOT prohibit any officer, director or other employee of a TARP recipient receiving annual compensation in excess of the U.S. President. This provision, added with extensive press coverage by Senator McCaskill (D – Missouri), did NOT make the final legislation.
Compensation Policies and Governance
For so long as the Treasury holds preferred stock in an institution:
- the company must provide for the recovery by the institution of any bonus, retention award or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate;
- the company must establish an independent Board Committee to meet at least semi-annually to evaluate the risks of the entity’s compensation plans (but for private institutions receiving less than $25 million, this review can be done by the board of directors);
- the company must provide annual certifications of compliance, signed by the CEO and CFO, with the executive compensation restrictions;
- the company’s board of directors must adopt a company-wide policy regarding “excessive or luxury expenditures,” including excessive expenditures on entertainment, office and facility renovations, and aviation or other transportation services.
- the company cannot incent the senior executive officers to take “unnecessary and excessive risk;” and
- the company may not provide any compensation plan “that would encourage manipulation of the reported earnings … to enhance the compensation of any of its employees.”
Shareholder Approval of Compensation
All TARP recipients will be required to permit a separate shareholder vote to “approve” the compensation of its executives. This shareholder vote will be non-binding and does not overrule the board’s decision. This provision is frequently referred to as a say-on-pay provision. The legislation requires that the SEC implement final regulations to implement the statute within one year. Based on the statute, this requirement may apply to public and private institutions, although the enforcement for private institutions seems difficult.
Elimination of Restrictions on Redemption
The Stimulus Legislation permits TARP recipients, following consultation with their primary federal banking regulator, to redeem any TARP assistance at any time, without regard to whether they have replaced such funds from any other source. Moreover, for public companies, the Treasury will then liquidate warrants associated with such assistance “at the current market price.” This effectively eliminates the requirement for the TARP Capital preferred shares to be held for at least three years unless replaced by a subsequent private offering.