Treasury Issues New Rules on Executive Compensation for TARP Participants

Late last week, the Treasury department issued an interim final rule (somewhat of an oxymoron, but that is what it is called) entitled "TARP Standards for Compensation and Corporate Governance."  The Treasury Department was given this authority under the Emergency Economic Stabilization Act of 2008 passed last October in the deepest part of the crisis and amended by the American Recovery and Reinvestment Act of 2009, passed following the dust-up about retention bonuses provided to certain executives at AIG.  The full text of the regulation is available here (beware, it is 123 pages).  It supercedes the executive compensation interim rule issued after the EESA by incorporating the greater restrictions on executive comp in the Recovery Act.

The limits apply to those executives named in the company's proxy statements as well as a certain number of "the most highly compensated employees" at each firm.  The number of these employees that are subject to the regulations varies depending on how much financial support the firm has received under TARP.  For example, for those institutions receiving over $500 million in assistance, the five senior executive officers and the 20 most highly compensated employees are covered.

First, the regulation provides guidance to executive compensation committees at the TARP recipient to comply with the requirements of the EESA that it structure compensation to limit unnecessary short-term risk taking by management.  The committee must review, evaluate and report about the executive compensation of the named executives and highly compensated employes every six months.  The report, which must be filed with the SEC, has to include "a narrative description of how [executive compensation] plans do not encourage [executives] to take unnecessary and excessive risks that threaten the value of the TARP recipient." 

Second, the regulation provides for the recovery of any bonus, retention awards or other incentive compensation paid based on materially inaccurate earnings, revenues, gains or other performance criteria that caused the bonus to be paid.  The new rule requires that the TARP recipient actually exercise its clawback rights in such a case unless the TARP recipient can demonstrate that it would be unreasonable to do so (for example, if the expense of enforcing the clawback right exceeds the benefits of doing so).  It is still unclear how this gets enforced if the government disagrees either (1) with the company's decision that a bonus was not paid based on materially inaccurate information; or (2) does not exercise its clawback rights or determines it would be unreasonable to exercise them.

Third, it further curtails so-called "golden parachutes."  Aside from extending the restriction to a larger class of employees, the new rule also curtails payments made to executives leaving a company due to a change in control, such as an acquisition or merger with another company.

The rule also creates a "Special Master" to oversee executive compensation at firms receiving "exceptional assistance" under TARP.  Currently, the group deemed to have received exceptional assistance includes AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial.  He will review compensation to named executives and the 100 most highly compensated individuals.    These company's must get compensation packages for these individuals approved by the Special Master, who may reject them if he deems them inconsistent with the goals of TARP.  However, compensation will automatically be approved -- a so-called safe harbor -- if the compensation does not exceed $500,000.

Finally, the rule sets forth a number of requirements that were not explicitly included in the EESA or the Recovery Act.  The rule prohibits the payment to senior executive officers and the 20 next most highly compensated employees of a tax "gross-up," or a payment to cover taxes due on compensation such as golden parachutes and perquisites.  TARP recipients will be required to disclose any perquisites provided to any employee subject to the Recovery Act's bonus limitations with total value exceeding $25,000.  TARP recipients will also be required to provide a nar rative description of, and justification for, the benefit.  The rule also requires financial institutions to disclose the use of compensation consultants and the methodology used by the consultant, such as "benchmarking" procedures in the consultants analysis. 

Comments

[Colorado Home Mortgage]

good they need to do that

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http://www.coloradomortgage.me

[Loan Modification Concerns]

It's only going to get worse. Oh and by the way where did all that money go? Nobody knows.