The terms of the stimulus package broadly expand restrictions on executive compensation under the Capital Purchase Program, but allow institutions to return Treasury funding without penalty to avoid these new restrictions.  

All recipients of federal aid under the Troubled Assets Relief Program (TARP), including the recipients of aid under the Capital Purchase Program (CPP), will be impacted by the new executive compensation restrictions contained in the stimulus bill which amends Section 111 of the Emergency Economic Stabilization Act of 2008 (EESA) in its entirety. As we are distributing this Update, the House has already passed the measure, and the Senate is expected to act shortly. If passed in its current form as is expected, the compensation limits under the American Recovery and Reinvestment Act of 2009 (ARRA) will represent a substantial policy shift related to TARP assistance generally.  

Most of the new restrictions will apply to existing and future TARP recipients for so long as Treasury financial assistance to the institution remains outstanding (unless the only securities outstanding are warrants to acquire the common stock of the institution). In addition, the institution may avoid any of these restrictions by repaying the TARP assistance previously provided (in consultation with the appropriate federal banking regulator) without regard to any requirement to raise replacement funds or observe any applicable waiting periods on repayment. If Treasury is repaid in this manner, Treasury will liquidate the warrants it holds “at the current market price.”  

Regardless of the statutory permission to return TARP funds, such a move may be fraught with peril. Companies that return capital to the government to not be subject to compensation limits will need to justify that not only with regulators, but shareholders as well. While there may be valid reasons for electing to repay TARP funds (e.g., competition for and retention of senior staff), boards of directors’ deliberations will be under great scrutiny. The decision making process for considering the return of TARP funds must be fully and carefully designed to avoid conflicts and make sure the reasoning is sound.  


The amendments to EESA would require Treasury to review the bonuses, retention awards, and other compensation paid to the top five senior executive officers (SEOs) and the next 20 most highly compensated employees of each entity that has previously received TARP assistance. If Treasury determines that any of these payments were inconsistent with the purposes of TARP or public interest, Treasury is authorized to negotiate with the institution and the applicable employee for appropriate reimbursement to the government.  


The amendments to EESA to be enacted by the stimulus bill broaden the scope of existing executive compensation provisions as follows:

  • Currently TARP recipients are prohibited from paying golden parachute payments to any of their SEOs in excess of three times a base amount determined by reference to prior taxable income to the SEOs. This requirement will now define “golden parachute payment” to be any payment for departure from the institution for any reason except for payments relating to services already performed or benefits previously accrued. This would appear to prohibit the payment of severance in any amount. This requirement would also be imposed for any of the next five most highly-compensated employees (ten employees in total).  
  • While TARP recipients are already required to implement provisions to clawback bonuses and incentive compensation from their SEOs if any of the criteria on which such compensation is based is later found to have been materially inaccurate, all TARP recipients must now implement provisions to clawback bonuses and incentive compensation from any of the next 20 most highly-compensated employees.  

In last week’s announcement, Treasury proposed to impose a $500,000 cap on SEO annual compensation (excluding restricted stock or similar long-term incentives). There is no dollar limitation present in the current version of the stimulus bill.  


The amendments to EESA to be enacted by the stimulus bill tighten restrictions related to incentive compensation programs as follows:

  • While TARP recipients are already required to ensure that incentive programs for SEOs do not encourage “unnecessary and excessive risk,” these institutions would now be specifically required to eliminate any compensation plan that would encourage manipulation of reported earnings of the institution to enhance the compensation of any of its employees.  
  • TARP recipients would also be prohibited from paying or accruing any bonus, retention award, or incentive compensation to certain individuals (unless such bonus was required to be paid under a valid employment agreement entered into on or before February 11, 2009). The individuals covered by this prohibition would depend upon the amount of TARP funding received by the institution according to the following sliding scale:  

TARP Funding 

Less than $25,000,000



$500,000,000 or more

Persons Covered  

One most highly-compensated employee  

Five most highly-compensated employees  

SEOs and next ten most highlycompensated employees  

SEOs and next twenty most highlycompensated employees  

For all institutions at the $25,000,000 or more level, these are the minimum number of individuals covered and Treasury may increase the number of persons subject to these restrictions.  

  • The foregoing restrictions on incentive compensation will not prohibit the payment of long term restricted stock provided the stock does not vest while any obligation (other than warrants) remains issued and such restricted stock may not constituted more than onethird of the total amount of annual compensation of the employee receiving the stock. It is unclear if these restricted stock grants may be made annually to each employee.  


The requirements announced last week by Treasury with respect to chief executive officer certification of compliance with TARP guidelines have been expanded by the stimulus amendments to require that certifications be made by both the chief executive officer and chief financial officer of the institution either in the annual filings required to be made to the Securities and Exchange Commission (if publicly-traded) or to the Treasury (if not publicly-traded).  

In addition, under the proposed amendments to EESA, a Board Compensation Committee consisting entirely of independent directors must meet at least twice per year in order to conduct risk assessments of all employee compensation plans. If an institution has both (i) received TARP funds of $25,000,000 or less and (ii) has no common or preferred securities registered under the Securities and Exchange Act of 1934, this analysis may be performed by the board of directors of the institution.

The foregoing requirements appear to override the previous requirement that the compensation committee certify (with the assistance of appropriate risk officers) that the incentive compensation does not encourage excessive and unnecessary risk.  


A non-binding shareholder vote on executive compensation (a so-called “say on pay” proposal) will be required of all TARP recipients in proxy materials for any annual or other meeting of shareholders for so long as any obligation (other than warrants) remains outstanding. Unlike previous governmental proposals, this shareholder “say on pay” is not optional on the part of TARP recipients (i.e., previous governmental proposals had provided that certain compensation limits would be waiver for institutions choosing to provide “say on pay”).  


As was previously announced by Treasury last week, the stimulus package provides that the board of directors must adopt a company-wide policy related to “luxury expenditures” which are any expenditures related to aviation or transportation services, office and facility renovations, entertainment or events, and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives, and other measures tied to a company's normal business operations.  


The amendments of the stimulus bill do not impact or change the existing requirements limiting deductions on executive compensation paid in excess of $500,000 to each of the SEOs. These restrictions will continue to apply to all institutions that have, or will, receive TARP funds.  

It is clear that there are many questions left unanswered by these proposed amendments which will need to be clarified. However, the expected enactment of these changes makes it certain that the regulation of executive compensation will continue to be a “hot button” topic for the foreseeable future.