On February 4, 2009, the U.S. Department of the Treasury (“Treasury”) announced enhanced conditions on executive compensation for executives of financial institutions that (i) receive “exceptional financial recovery assistance” or (ii) participate in a “generally available capital access program” that Treasury announces in the future. The Treasury guidelines would not apply retroactively to programs already announced, such as the TARP Capital Purchase Program or the Term Asset-Backed Securities Loan Facility. However, the Senate version of the economic stimulus bill (H.R.1) contains amendments offered by Senator Dodd and Senator McCaskill that would apply these guidelines and other compensation limits retroactively to any financial institution that has received funds under any TARP program.
The new guidelines focus on:
- Limiting annual total compensation for senior executives to no more than $500,000, except for certain restricted stock awards.
- Requiring that certain restricted stock or other awards contain specified vesting and “cash-out” restrictions.
- Expanding the application of required clawbacks and the limitations on golden parachute payments.
- Requiring the adoption and publication of company policies with respect to “luxury” items, such as aviation, office and facility renovations, entertainment and holiday parties, and conferences and events.
- Requiring non-binding shareholder “say-on-pay” resolution.
According to Treasury and statements made by President Obama and Secretary Geithner, these conditions seek to strike a balance between “the need for strict monitoring and accountability on executive pay” and the need for financial institutions to attract talented executives.
Although grand in their announcement, the new guidelines will initially have limited applicability beyond the financial institutions that have negotiated agreements with Treasury. The new guidelines will have a greater impact on financial institutions contemplating participation in any future TARP program. If and when a future generally available capital access program is announced, financial institutions that participate in the program will need to carefully review the provisions related to executive compensation and carefully consider the impact of those provisions on their ability to achieve their institutional strategic objectives. The Treasury guidance most importantly serves as a precursor to the new administration’s future attempts to limit executive compensation and the type of scrutiny that companies in all industries may face from shareholders on issues related to executive compensation. Treasury highlighted several steps it believes should be considered by federal regulators and financial institutions as part of a long-term review of model executive compensation practices for all financial institutions, including:
- Enhanced disclosure of how compensation arrangements are designed to promote sound risk management and long-term value creation.
- Encouragement of incentive compensation tied to the creation of long term shareholder value.
- Say-on-pay provisions.
In addition, Treasury announced that it will hold a conference to explore best practices and guidelines on executive compensation practices for financial institutions.
While we await more guidance from Treasury and future government-mandated directives such as the provisions of the economic stimulus bill on executive compensation, companies and their executives should continue to review all current executive compensation practices for all executives and identify any areas that can be modified or need additional support.
The full text of Treasury’s press release may be accessed at http://www.treas.gov/press/releases/tg15.htm.