On February 4, 2009, the White House and the US Department of Treasury (the “Treasury Department”) issued a press release announcing a $500,000 pay limit and other restrictions on the senior executives of companies that will receive “exceptional assistance” (companyspecific negotiated agreements with the Treasury Department) from the second half of the $700 billion federal bailout. The Obama administration plans to impose similar, but more lenient, pay restrictions on companies that will receive bailout money under the “generally available capital access program” (i.e., under terms applicable to all recipients, with limits on the amount each company may receive and specified returns for taxpayers).

As indicated in the White House press release, the new executive compensation restrictions will not apply retroactively to existing investments of the federal funds or to previously announced bailout programs, such as the Capital Purchase Program. The press release is available online at http://www.ustreas.gov/press/releases/tg15.htm.

The next day, on February 5, 2009, the Senate approved an amendment to the federal bailout program that would further restrict bonus and severance pay to executives and enhance the clawback mechanism by allowing the Treasury Department to be reimbursed if it deems executive pay to be “excessive, inconsistent with the purposes of [the federal bailout program], or otherwise contrary to the public interest.”

Exceptional Assistance—Pay Restrictions

The senior executives of a company that receives “exceptional assistance” will be subject to the following pay restrictions:

  • A $500,000 cap on the total annual compensation paid to senior executives. The existing rules merely prohibit the company from taking a tax deduction for pay above $500,000.
  • Any additional pay to these senior executives must be made in the form of restricted stock or other similar long-term incentive arrangements that cannot be sold or liquidated until the government has been repaid with interest (or until the end of another period that takes into account the extent a company has satisfied its repayment obligations, protected taxpayer interests or met lending and stability standards). The existing rules do not regulate the medium of pay.
  • The pay structure of the top senior executives must be subject to a non-binding shareholder resolution. The existing rules do not require any “say on pay” provision.
  • A clawback of bonuses and incentives by the top 25 senior executives if they are found to have knowingly provided inaccurate information related to company financial statements or performance measurements on which such pay is based. The existing rules only subject the top five senior executives to a clawback provision.  
  • A ban on golden parachutes for the top ten senior executives upon their severance from employment. The next 25 executives, at a minimum, will be prohibited from receiving any golden parachute payment greater than one year’s compensation. The existing rules only prohibit golden parachute payments to the top five senior executives, with no restrictions on any others.
  • All luxury expenditures (e.g., corporate jet, office and facility renovations, entertainment and holiday parties) and unreasonable expenditures for conferences and events must be approved in accordance with a company-wide policy adopted by the board of directors. The CEO must certify the types of expenditures that could be viewed as excessive or luxury items. The policy should be posted on the company’s website. The existing rules do not require a company to adopt a luxury expenditure policy.

Generally Available Capital Access Program— Proposed Pay Restrictions

For companies participating in the “generally available capital access program” in the future, the Treasury Department intends, within the upcoming weeks, to issue proposed guidance, subject to public comment, on the following executive pay restrictions:

  • Impose a “$500,000 plus restricted stock” rule, which may be waived only by (i) expanding the disclosure of the reasons that compensation arrangements do not encourage excessive and unnecessary risk-taking beyond the senior executives and to other employees and (ii) if requested, a non-binding “say on pay” shareholder resolution.
  • Impose the same clawback provisions applicable to companies that receive exceptional assistance, thus requiring a clawback with respect to the top 25 senior executives (as opposed to five senior executives).
  • Limit golden parachute payments for the top five senior executives to one year’s compensation (as opposed to three years).
  • Impose the same company-wide policy requirement relating to the approval of luxury expenditures applicable to companies that receive exceptional assistance.


The broadened category of “senior executives” leaves the term open to interpretation and prone to loopholes.

Similar to the existing rules, the guidance fails to set forth enforcement mechanisms, although media attention and the public outcry may accomplish this objective.

It remains to be seen what impact these pay restrictions will have on a company’s decision to accept bailout funds, as well as the senior executives’ willingness to remain with the company and the company’s ability to attract top executive talent.

Mandatory Certifications and Disclosures

The CEOs of all companies that received, or receive, government assistance must certify annually that their company has strictly complied with statutory, Treasury Department and contractual executive compensation restrictions. In addition, the compensation committees of such companies must provide an explanation of how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.

More to Come

With a goal of long-term regulatory reform within the financial industry, the Obama administration also proposed compensation strategies directed at all public financial institutions on a “companywide” basis—not just those limited to the top senior executives of companies receiving government assistance. The proposed initiatives include:

  • A requirement that the top executives hold company stock for several years before cashing out their awards.
  • A requirement for non-binding “say on pay” shareholder resolutions.
  • A joint effort between the Treasury Department and the Securities and Exchange Commission to require the compensation committees to provide risk-management and value creation disclosures with respect to executive and certain employee compensation arrangements.

An affected company may want to rethink its compensation philosophy, restructure pay arrangements for a broader group of executives, revamp its corporate governance procedures and enhance executive compensation disclosures to comply with the new bailout guidance.