This morning, President Obama announced that the Treasury Department was issuing new executive compensation limits on institutions receiving TARP funding. Said the President:  

“In order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street. … As part of the reforms we're announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 -- a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance. Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives, and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of golden parachutes.”

The Treasury Department’s new guidelines on executive pay for financial institutions receiving government assistance are designed “to ensure that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial system and not toward inappropriate private gain.” Treasury’s announcement also states that “the standards today mark the beginning of a long-term effort to examine both the degree that executive compensation structures at financial institutions contributed to our current financial crisis and how corporate governance and compensation rules can be reformed to better promote long-term value and growth for shareholders, companies, workers and the economy at large and to prevent such financial crises from occurring again.”

The guidelines distinguish between banks participating in any new “generally available capital access program” (the Capital Purchase Program and the Term Asset-Backed Securities Loan Facility are examples of generally available capital access programs) and financial institutions needing “exceptional assistance” (more assistance than is allowed under a generally available standard program) under a specifically negotiated agreement with Treasury (for example, Treasury’s arrangements with AIG, Bank of America and Citigroup would be considered “exceptional assistance”). Treasury was clear to note that the compensation restrictions announced today would apply only a prospective basis to new generally available capital access programs and financial institutions seeking new government aid, and not to existing programs.  

The following restrictions will apply to companies receiving exceptional financial recovery assistance:

  • Total annual compensation for senior executives must be limited to $500,000. Any additional pay for senior executives must be in the form of restricted company stock that vests only after the U.S. Government has been repaid with interest.
  • Senior executive compensation structure and rationale for how the compensation is tied to sound risk-management principles must be fully disclosed and subject to a non-binding “say on pay” shareholder resolution.
  • Companies must have “bonus clawback” provisions for the 25 most senior executives if any of them are found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate pay.
  • Companies must have a ban on “golden parachutes” for the top ten senior executives and a limit on golden parachutes for the next 25 most senior executives in excess of one year’s compensation.
  • Companies’ boards of directors must adopt company policy regarding approval of “luxury” expenditures, such as aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events (other than reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to a company's normal business operations).  

The following restrictions (subject to a public comment period) will apply to companies participating in new generally available capital access programs:

  • Total annual compensation for senior executives must be limited to $500,000. This restriction may be waived only if a company provides full disclosure as to why the compensation arrangements do not encourage excessive and unnecessary risk taking, and are subject (upon request) to shareholder say on pay.
  • Companies must have bonus clawback provisions similar to those applicable to companies receiving exceptional assistance.
  • Companies cannot provide golden parachutes for any of its top five senior executives in excess of one year’s compensation.
  • Companies’ boards of directors must adopt company policies regarding approval of “luxury” expenditures similar to those applicable to companies receiving exceptional assistance.  

In addition to the new restrictions on executive compensation for aid-seeking firms, the Treasury announced several initiatives it would be pursuing, with a goal of “developing model compensation policies” for all financial institutions, including:

  • Working with the SEC to require all compensation committees of public financial institutions to review and disclose strategies for aligning compensation with sound risk management and long-term value creation.
  • Revamp compensation of top executives to include incentives that encourage a long-term perspective, such as requirements that executives hold company stock for several years after being awarded.
  • Permitting non-binding “say on pay” shareholder resolutions on executive compensation.  

Treasury also noted that it would be hosting a “conference with shareholder advocates, major public pension and institutional investor leaders, policy-makers, executives, academics, and others on executive pay reform at financial institutions” at which Treasury would seek “testimony, comment, and white papers on model executive pay initiatives in the cause of establishing best practices and guidelines on executive compensation arrangements for financial institutions.”