The version of the stimulus bill passed today by the Senate (H.R. 1) contains sweeping new executive compensation restrictions on institutions that have already received or will receive TARP assistance. The House version of the bill does not contain similar executive compensation provisions, but new restrictions were included in a separate bill that previously passed the House (HR 384). The stimulus bill is already headed for a conference to resolve the differences between the House and Senate versions. At this point, conference is expected to be swift, as the current goal is to have a bill ready for President Obama to sign by President's Day.
The Senate bill contains more restrictive provisions than those previously passed by the House and those recently announced by the Administration. In particular, the Senate provisions would apply to institutions that have already received TARP assistance or are in previously announced programs; would apply to a broader group of officers and, in some cases to all employees; and would not depend (as did the Administration proposal) on the level of assistance received by the institution. Under current rules, Treasury has leeway to determine what restrictions are appropriate; the Senate bill would restrict Treasury's discretion, and would require imposition of the new restrictions, which would be in addition to the restrictions already imposed.
Institutions that have already received TARP funds may legitimately cry foul, as these new provisions, imposed retroactively, would significantly change the agreement under which the funds were received. At the very least, such institutions should be given an opportunity to unwind the transaction, should they decide that the new terms are more than they bargained for.
The restrictions that would be imposed by the Senate bill are summarized below. Unless specified, the provisions apply to institutions that have received or will receive TARP assistance. The provisions generally apply during any period that an obligation arising from TARP assistance is outstanding.
- No payment or accrual of bonuses, retention awards, or incentive compensation to at least the top 25 highest paid employees, or such greater number as determined by the Secretary of the Treasury. A similar provision is in HR 384.
- An institution that receives TARP assistance after the date of enactment or modifies current assistance must limit the compensation of all directors, executives, and other employees to no more than the compensation of the President of the United States (currently $400,000). This limit includes all compensation. The Administration proposal would have imposed a $500,000 limit, not including restricted stock, on companies that received exceptional assistance and allowed companies that had not received exceptional assistance to avoid the limit through disclosure and a nonbinding shareholder “say-on-pay” resolution. The Administration proposal would have applied only to the top five SEOs.
- In the case of institutions that have received TARP funds before the date of enactment, the Treasury is to review compensation arrangements to determine if any payments were excessive, inconsistent with TARP or otherwise contrary to the public interest. If so, Treasury is to negotiate with the institution and employee to seek appropriate reimbursement to the Federal government. There is no indication of how far back this provision might reach.
- Companies that participated in TARP in 2008 and that paid bonuses to directors and officers in excess of $100,000 would be required to redeem stock acquired by Treasury in the amount of the excess bonus or pay a 35% excise tax.
- Golden parachute payments may not be made to the SEOs or any of the next five most highly compensated employees. A “golden parachute payment” is defined as any payment for departure from the institution for any reason, except for payments for services performed or accrued. Thus, severance payments for the CEO, CFO and the next eight mostly highly compensated executives would be prohibited.
- The Board of Directors must adopt a policy with respect to excessive or luxury payments, such as entertainment, office renovations, and aviation services.
- Publicly traded companies must submit compensation of executives to an annual nonbinding shareholder vote. The SEC would be required to promulgate rules to implement this restriction within one year of the date of enactment.
- The institution is subject to other requirements, including an expanded claw back provision covering at least 25 employees, CEO certification that the applicable requirements had been met, a review of compensation arrangements in order to ensure that they do not promote manipulation of earnings, as well as the now-familiar original TARP restrictions of the$500,000 deduction limit on compensation under Section 162(m)(5), and prohibition on incentives for senior executive officers to take unnecessary or excessive risks that threaten the value of the institution.