On June 10, 2009, the US Department of the Treasury ("Treasury") issued regulations that implement the executive compensation restrictions and corporate governance standards mandated under the Emergency Economic Stabilization Act of 2008 ("EESA"), as amended by the American Recovery and Reinvestment Act of 2009 ("ARRA"). The regulations apply to senior executive officers and a number of the most highly compensated employees of companies receiving financial assistance from the federal government through the Troubled Asset Relief Program ("TARP recipients"). In addition, the regulations establish an office (the "Special Master") responsible for overseeing compliance with the compensation standards. The regulations, effective June 15, 2009, supersede all prior related guidance.


The regulations serve as an interim final rule on the compensation restrictions and governance standards for companies participating in the Troubled Asset Relief Program ("TARP") and a number of their executives and employees.

Covered Entities

A TARP recipient is a company that has or will receive financial assistance under TARP. Financial assistance under TARP is generally obtained through (i) a sale by a company of its preferred stock to Treasury through the Capital Purchase Program; (ii) a sale by a company of its troubled assets to Treasury; or (iii) the insurance of a company's troubled assets by Treasury. A TARP recipient includes the company receiving the assistance, as well as any entity of which the TARP recipient owns at least 50 percent (or which owns at least 50 percent of the TARP recipient).

The requirements generally apply during the period any "obligation" arising from the financial assistance under TARP remains outstanding (disregarding any period during which Treasury only holds warrants to purchase common stock of the TARP recipient). A TARP recipient's obligation is satisfied when the TARP recipient repays the debt to Treasury or redeems or repurchases the equity security from Treasury.

Covered Persons

The executive compensation restrictions and corporate governance standards in the regulations apply to senior executive officers ("SEOs") and a certain number of the next most highly compensated employees.

The TARP recipient's SEOs each year are those executive officers whose compensation for the prior year is disclosed in the company's proxy statement or other annual compensation disclosure—generally, the principal executive officer ("PEO"), the principal financial officer ("PFO") and the three other most highly compensated executive officers. A company's most highly compensated employees in a current year are determined by ranking all employees other than the SEOs (including both officers and nonofficers) by their total "annual compensation" for the prior year. For this purpose, annual compensation is determined on the basis of the Summary Compensation Table rules established by the Securities and Exchange Commission (the "SEC"), irrespective of whether the compensation is includible in the employee's gross income for tax purposes.

Private companies that do not have securities registered with the SEC must apply analogous rules to identify their employees subject to the restrictions and compensation standards. In the context of acquisitions, mergers and reorganizations, the regulations provide special rules for identifying such employees.

Compensation Restrictions

The regulations limit the compensation packages for certain employees by prohibiting bonus payments, golden parachutes and tax gross-ups.

Prohibition on Bonus Payments

Generally, no "bonus payments" (i.e., payments in the nature of a bonus, retention award, or incentive compensation) may be paid to certain employees during the TARP period, unless an exception applies. The number of employees affected by this restriction ranges from one to 25 (subject to increase by Treasury), depending on the level of assistance provided to the TARP Recipient. As summarized in the table below, the regulations provide a nonexhaustive list of examples that distinguish the types of payments that constitute bonus payments and cannot be paid to certain employees, from other payment types that do not constitute bonus payments and are permitted.

To view table click here.

There are three exceptions to the general rule that prohibits bonus payments: restricted stock, bonus payments under pre-February 11, 2009 employment contracts, and limited bonuses during the first year of financial assistance.

Restricted stock. Restricted stock (and restricted stock units or "RSUs") are permitted, providing the following requirements are satisfied:

  • The value of restricted stock granted cannot exceed more than one-third of the employee's "adjusted annual compensation" for the year it is granted. Unlike the "annual compensation" used to determine SEOs and the most highly compensated employees, the "adjusted annual compensation" for purposes of the one-third rule is determined using the current year compensation (rather than the prior year's annual compensation) and taking into account the full value of equity compensation on the grant date (rather than spreading the full value in equal tranches over the vesting period, as required by the SEC rules).


During 2010, Employee A receives US$600,000 salary and a US$300,000 long-term restricted stock grant subject to a three-year vesting period. For purposes of determining whether A's restricted bonus grant satisfies the restricted stock exception, Employee A's adjusted annual compensation is US$900,000 (US$600,000 salary + US$300,000 restricted stock). Since the US$300,000 value of the restricted stock does not exceed one-third of the US$900,000 adjusted annual compensation, the grant satisfies the restricted stock exception.

  • The restricted stock may not vest until the employee has provided services to the TARP recipient for at least two years from the date of grant (or, if earlier, upon a change in control event or the employee's death or disability).
  • The restricted stock may not become transferable (or payable in the case of a RSU) at any time earlier than permitted under a schedule that is based on the TARP recipient's repayment of the financial assistance. For each 25 percent of total financial assistance that is repaid, 25 percent of the total restricted stock granted may become transferable. Upon the final repayment, all restricted stock will become transferable.

Pre-February 11, 2009 Employment Contracts. The regulations permit bonus payments that are required to be paid under a valid written employment contract (e.g., employment agreement, compensatory plan and award agreement) executed on or before February 11, 2009, if the employee has a legally binding right to the payment under the contract. Any subsequent amendment to the contract to increase the amount payable, accelerate any vesting conditions, or otherwise materially enhance the benefit available to the employee under the contract, will result in a loss of this exemption.

Limited bonuses during first year of financial assistance.

For companies that become TARP recipients after June 15, 2009, the prohibition on bonus payments does not apply to amounts paid to, or accrued by, the affected employees for services rendered before the first date of the TARP period. If a bonus payment relates to a service period beginning before and ending after the first date of the TARP period, the bonus payment is permissible, provided that such payment is reduced by an amount attributable to the portion of the service period that begins with the first date of the TARP period. However, if the employee is subject to the bonus limitation at the time the amount would otherwise be paid, the reduced bonus payment still may not be paid until such time as bonus payments to that employee are permitted (presumably when the employee is no longer a SEO or most highly compensated employee).

Prohibition on Golden Parachute Payments

The regulations prohibit a TARP recipient from making any severance payment ("golden parachute payment") to a SEO or any of the next five most highly compensated employees. With some exceptions, a golden parachute payment includes any payment on account of departure from a TARP recipient or in the event of a change in control. The exceptions include payments for services performed or benefits accrued, qualified retirement plan benefits, payments made by reason of death or disability of the employee, or severance payments required by state or foreign law.

The regulations contain an anti-abuse provision, in which the present value of all payments is treated as paid on the date of departure or change in control, without regard to the actual timing of the payment. Thus, a golden parachute payment during the TARP period may include a right to amounts actually payable after the TARP period. Accordingly, TARP recipients may not avoid this restriction by deferring payment of such amounts until after the end of the TARP period.

Prohibition on Tax Gross-ups

TARP recipients are prohibited from providing tax gross-ups to any of the SEOs and the next twenty most highly compensated employees during the TARP period. For this purpose, providing a gross-up includes providing a right to a payment of such gross-up at a future date—for example, a date after the TARP period.

US$500,000 deduction limit.

The previous TARP guidance required that all TARP recipients agree, in their applicable TARP contracts with Treasury, to forgo any deduction for federal income tax purposes for compensation paid to SEOs in excess of US$500,000. The recent regulations, effective June 15, 2009, do not impose this tax-related restriction. However, this restriction within TARP contracts entered into prior to June 15, 2009 remains in effect. Accordingly, these TARP recipients continue to be required to forgo the applicable deduction. In addition, Treasury anticipates requiring this condition in any future agreements to provide TARP assistance.

Corporate Governance Standards

In addition to compensation restrictions, the regulations establish corporate governance and transparency standards regarding compensation practices, which impose clawback provisions, require luxury expenditure policies, mandate perquisite and compensation consultant disclosures, institute "say on pay" requirements, assign additional responsibilities to the compensation committee, and require PEO and PFO certifications attesting to the adherence of these standards.

Clawback Provisions

Each TARP recipient must subject any bonus, retention award and incentive compensation made to a SEO or the next twenty most highly compensated employees during the TARP period to recovery or cancellation ("clawback") if such payment was based on materially inaccurate financial statements or any other materially inaccurate performance metric. Whether a financial statement or performance metric is materially inaccurate depends on all facts and circumstances. However, a financial statement or performance metric shall be treated as materially inaccurate with respect to any employee who knowingly engaged in providing inaccurate information (or knowingly failed to timely correct such inaccurate information). The TARP recipient must exercise its clawback rights, except to the extent it demonstrates that it is unreasonable to do so (e.g., where the expense of enforcing the rights would exceed the amount recovered).

Luxury Expenditure Policy

Each TARP Recipient's board of directors must adopt a policy on excessive or luxury expenditures that addresses the following four categories: entertainment or events, office and facility renovations, aviation or other transportation services and other similar items, activities or events. The policy is designed to eliminate excessive and luxury expenditures. The written standards must (i) identify the types of categories of expenditures that are prohibited or require prior approval (e.g., mandate a threshold expenditure amount per item or per employee); (ii) provide approval procedures; (iii) require PEO and PFO certification that prior approval has been obtained; (iv) require prompt internal reporting of any policy violation and (v) mandate accountability for adherence to the policy. The policy must be filed with Treasury and the primary regulatory agency and posted on the TARP recipient's website by the later of September 14, 2009, or 90 days after the closing date of the agreement between the TARP recipient and Treasury.

Perquisite Disclosure

The TARP recipient must provide to Treasury and its primary regulatory agency a narrative description (including the nature, amount and justification) of perquisites whose total value exceeds US$25,000 for any employee who is subject to the limitations on bonus payments.

Compensation Consultant Disclosure

Annually, the TARP recipient must provide a narrative description of whether the company, its board of directors or its compensation committee has engaged a compensation consultant and the types of services that the compensation consultant or its affiliates has provided during the past three years (including benchmarking, peer group studies to identify certain percentile levels of compensation, or non-compensation related services). For example, the disclosure must specify the entities used for benchmarking, the justification for using these entities and the lowest percentile level proposed for compensation. The TARP recipient must provide such disclosure to Treasury and to its primary regulatory agency within 120 days of the completion of a fiscal year during the TARP period.

Say on Pay

Each TARP Recipient must include within its annual proxy statement a nonbinding shareholder vote to approve the compensation of executives. EESA, as amended by ARRA, instructs the SEC to issue final rules implementing this provision by February 16, 2010. On July 1, 2009, the SEC issued proposed "say on pay" regulations applicable to TARP recipients.

Compensation Committee Review

Each TARP Recipient must establish a compensation committee, comprised of independent directors, which meets at least semiannually with the TARP recipient's senior risk officers to discuss and evaluate (i) the SEO compensation plans to ensure that such plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the TARP recipient and (ii) employee compensation plans to identify and eliminate risks posed by certain features of such plans. The compensation committee must also meet at least semiannually to evaluate whether the employee compensation plans encourage the manipulation of reported earnings of the TARP recipient to enhance compensation thereunder and remove any such aspects in these plans.

Annually, the compensation committee must certify that it has completed this required review and provide a narrative description of its analysis and any actions taken to eliminate any features in these plans that raise a concern. These certifications and narrative descriptions must be provided in the Compensation Committee Report required in annual filings with the SEC. A private TARP recipient must provide the certification and disclosure to Treasury and to its primary regulatory agency.

PEO and PFO certification

Within 90 days following the completion of the TARP recipient's fiscal year, its PEO and PFO must provide a certification of compliance with the executive compensation pay restrictions and standards. The certifications must be filed as an exhibit to the annual report on Form 10-K and to Treasury. A private TARP recipient must provide these certifications to Treasury and to its primary regulatory agency. The regulations provide models for the first and subsequent certifications.

Government Oversight

The regulations establish the Office of the Special Master for TARP Executive Compensation (the "Special Master"). As outlined in the regulations, the Special Master is responsible for reviewing compensation structures and payments to determine whether such amounts are inconsistent with the purposes of EESA or TARP, or otherwise contrary to the public interest. The Special Master is authorized to issue advisory opinions as to whether compensation structures and payments meet this standard.

TARP recipients that receive "exceptional financial assistance" must submit for approval by the Special Master (i) the compensation structures and payments for the SEOs and the most highly compensated employees who are subject to the bonus limitation and (ii) the compensation structures for all other executive officers and the 100 most highly compensated employees who are not subject to the bonus limitations. However, any TARP recipient or employee of such entity may request from the Special Master (or the Special Master may independently initiate) an advisory opinion as to whether compensation structures or payments are inconsistent with the purposes of EESA or TARP, or otherwise contrary to the public interest.

Safe Harbor. No prior approval is required for the executive officers and the 100 most highly compensated employees who are not subject to the bonus limitations if the total "annual compensation" for any such employee does not exceed US$500,000 (prorated for 2009). For this purpose, total annual compensation includes all equity-based compensation granted for the year (measured by the total fair market value on the grant date), the change in the actuarial present value of benefits under a pension plan, and above-market earnings on deferred compensation; but excludes long-term restricted stock or RSUs granted during the year.

If the Special Master renders an adverse opinion, the Special Master is authorized to negotiate with the TARP recipient and employee for appropriate reimbursements to the TARP recipient or federal government and to require that such compensation be altered to meet the standards under the regulations. In reviewing a compensation structure or payment, the Special Master is required to apply the following principles, and has discretion to determine the appropriate weight or relevance of a particular principle depending on the facts and circumstances:

To view table click here.

Additional Measures in the Pipeline

While the regulations will immediately impact TARP recipients, Treasury, the SEC and Congress continue to implement other measures intended to reform executive compensation practices with respect to all publicly-held US companies, as listed below.


The standards implemented for TARP recipients and the "best practices" proposed for all publicly-held US companies will change or influence compensation practices and disclosures. Please contact White & Case for more information on how these rules may impact your company.

Relevant Links

June 10, 2009 The TARP regulations on compensation standards (effective June 15, 2009)

June 10, 2009 Treasury statement on executive compensation with links to two fact sheets – http://www.ustreas.gov/press/releases/tg163.htm

June 10, 2009 SEC statement on executive compensation – http://www.sec.gov/news/press/2009/2009-133.htm

June 10, 2009 SEC proposed rules to facilitate director nominations

June 12, 2009 H.R. 2861, the "Shareholder Empowerment Act of 2009" – http://www.lw.com/upload/pubContent/_pdf/pub2689_1.pdf.

July 1, 2009 SEC proposed "say on pay" rules for TARP recipients http://www.sec.gov/rules/proposed/2009/34-60218.pdf

July 1, 2009 news release on SEC meetinghttp://www.sec.gov/news/press/2009/2009-147.htm

July 1, 2009 SEC order approving New York Stock Exchange Rule 452 – http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf

July 1, 2009 speech by SEC Staff on proxy disclosure changes – http://www.sec.gov/news/speech/2009/spch070109sh.htm.

July 1, 2009 speech by SEC Staff on "say on pay" – http://www.sec.gov/news/speech/2009/spch070109jh.htm

July 16, 2009 Treasury draft legislation to Congress – http://treasury.gov/press/releases/reports/titleixsubtdexeccomp%20.pdf

July 16, 2009 Treasury statement on compensation committee independence – http://treasury.gov/press/releases/tg218.htm

July 16, 2009 Treasury statement on "say on pay" legislation – http://treasury.gov/press/releases/tg219.htm

July 17, 2009 Chairman Barney Frank's "discussion draft" on executive compensation - http://www.house.gov/apps/list/press/financialsvcs_dem/comp_001_xml.pdf