On April 1, 2009, the House of Representatives approved H.R. 1664, the Grayson-Himes Pay for Performance Act, (the “Act”) and it was received by the Senate for consideration on April 2, 2009. The Act is largely a reaction to the recent public outrage surrounding large bonuses paid under existing agreements to executives and employees of Federal emergency capital investment recipient entities, and imposes compensation restrictions in addition to those already imposed under the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under the Act, a financial institution that has received, or receives at a later date, a direct capital investment under (i) the Troubled Assets Relief Program (TARP) or (ii) with respect to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a Federal home loan bank, under the amendments made by Section 1117 of the Housing and Economic Recovery Act of 2008, may not make a compensation payment under an existing or a new compensation arrangement to any employee that is “unreasonable or excessive” or is not directly based on “performance-based” measures. Longevity bonuses (undefined by the Act) and payments in the form of restricted stock are exempted from the compensation limits imposed by the Act.  

Community Financial Institutions that received $250,000,000 or less in capital investment under TARP may be exempted from the Act when the Secretary of Treasury determines that doing so is consistent with the purposes of the Act.  

The Act, as approved by the House, would give the Secretary of Treasury 30 days from enactment to establish rules to determine what arrangements constitute “unreasonable or excessive,” as well as standards for performance-based compensation under the Act. The Secretary must establish these rules and standards through consultation with the Chairperson of the Congressional Oversight Panel and receive the approval of the agencies that are members of the Federal Financial Institutions Examination Council during the 30-day period.  

It is unclear how quickly the Senate will move on this legislation. Clearly we have concepts for which we need more definition and guidance under the Act. That being said, some of the notable provisions of the House Bill include:  

Performance-Based Pay

The performance standards that will be applied to determine which bonus and retention payments may be paid include: (i) the stability of the institution and its ability to repay the United States, (ii) the performance of the individual receiving the compensation, (iii) adherence by executives and employees to appropriate risk management requirements, and (iv) other standards which provide greater accountability to shareholders and taxpayers.

Severance Pay

The act permits severance payments if the payments are not greater than $250,000 (or if less, an amount equal to such individual’s annual salary) and are made in the ordinary course of business to an employee who has been with the institution at least five years prior to termination of employment.  

Reporting Requirement

The Act also requires that recipient financial institutions report to the Secretary of Treasury the number of persons (officers, directors, and employees) that have received or will receive total compensation during the fiscal year over (i) $500,000, (ii) $1,000,000, (iii) $2,000,000, (iv) $3,000,000, and (v) $5,000,000, respectively. This report is due 90 days after the Act is enacted (for calendar year 2008 compensation) and each year thereafter on March 31 until the institution has repaid its debt in full to the United States. Total compensation includes all cash payments, all transfers of property, amounts includable in income on exercise of stock options, on vesting of restricted stock, and all contributions by the company for that person’s benefit. Institutions are not required to identify individuals in its report to the Secretary of Treasury. The Secretary will make the numeric information available to the public through the internet.  

Period of Limitation on Compensation Pay

If the impacted institution enters into a comprehensive repayment agreement with the Secretary of Treasury then it is no longer subject to the limitations on compensation in the Act. However, if the institution defaults on its payments to the United States, then the limitations again become effective and any compensation payments that would have been prohibited under the Act must be surrendered to the Treasury. Once an impacted financial institution has repaid the Federal capital investment and such capital investment is no longer outstanding, the institution is no longer subject to the limits imposed on compensation pay by the Act.  

Commission on Executive Compensation

Interestingly, the Act also creates an Executive Compensation Commission which is charged with conducting a study of the executive compensation system for recipients of TARP funding. The charge of the commission is to examine: (i) how closely pay is linked to company performance (currently and in the past), (ii) how pay can be more closely linked to company performance, (iii) factors that influence pay, and (iv) how pay incentives affect executive behavior. The Act limits the commission’s scope to considering the effects of implementing increased shareholder voice in executive compensation as it relates to TARP funding recipients. However, some Washington officials have indicated that they would like to see a broader use of the Commission on Executive Compensation concept.