As widely publicized, the Emergency Economic Stabilization Act of 2008 contains limits on executive compensation for financial institutions that participate in the Troubled Asset Relief Program (TARP). Depending on the type and level of participation by the financial institution, these limitations include:
- prohibition of incentives that encourage “unnecessary and excessive risks”;
- substantial new limits on tax deductibility;
- prohibition of certain severance payments;
- new excise taxes and loss of deduction on “golden parachute” payments; and
- “clawback” provisions to recoup incentive compensation paid based on inaccurate financial criteria.
Last week, the Treasury Department issued guidance about the application of EESA's executive compensation restrictions to financial institutions that sell assets under Treasury's Troubled Assets Auction Program (TAAP), issue preferred stock and warrants under Treasury's Capital Purchase Program (CPP), or receive direct assistance under Treasury's program for systemically significant failing institutions. Alston & Bird has issued an advisory describing the executive compensation rules that will apply under each program.