The American Recovery and Reinvestment Act of 2009 imposes new executive compensation and governance standards for recipients of federal financial support. These new restrictions will also affect other employers as well.


The stimulus package, officially called The American Recovery and Reinvestment Act of 2009 ("ARRA"), was signed by President Obama on Feb. 17, 2009. It tightens the executive compensation restrictions on companies receiving U.S. Government assistance through the Troubled Assets Relief Program ("TARP"), established last year pursuant to the Emergency Economic Stabilization Act of 2008 ("EESA"). The statutory provisions also differ in a number of ways from the restrictions described in the Treasury Department's press release (Feb. 4, 2009) announcing standards applicable to new recipients of TARP assistance. On Feb. 24 and 26, 2009, the SEC issued some preliminary implementing guidance and more is expected from both the SEC and Treasury. For any company receiving TARP funds, the stimulus package effectively:

  • Prohibits all termination pay for the top ten executives.
  • Prohibits any bonuses, retention awards and incentive compensation for up to 25 top executives, except for limited amounts of restricted stock.
  • Expands both the scope and the depth of required clawback provisions.
  • Prohibits compensation that encourages earnings manipulation.
  • Requires companies to have a policy on luxury and excessive expenditures.
  • Requires companies to permit non-binding shareholder say-on-pay votes.
  • Imposes new compensation committee requirements.
  • Requires annual certifications of compliance from both CEOs and CFOs.

The stimulus package also shortens the period during which TARP recipients must comply with these standards and gives TARP recipients added flexibility to repay the assistance received and exit TARP. A table comparing EESA's requirements to the new requirements appears at the end of this alert.

What You Need To Do Now

If You Are TARP Recipient. It is not clear whether the new restrictions apply to TARP recipients with existing assistance agreements unless and until they are imposed by amendment of the assistance agreement. Until this question is settled, TARP recipients should approach the following actions with caution:

  • Signing or filing a certificate of compliance with applicable TARP requirements.
  • Issuance of proxy solicitation or similar materials that do not include a shareholder say-on-pay proposal.
  • Payment of any severance or other termination benefits to a top executive, or contracting to make such payments.
  • Payment of bonuses, retention awards and incentive compensation to top executives for 2008, whether in cash or stock.
  • Declaration of bonus or incentive opportunities for top executives for 2009, whether in cash or stock, or contracting for retention awards.

If You Expect to Be a TARP Recipient. Before you accept TARP assistance, you may wish to consider:

  • Whether these standards affect your decision to accept TARP assistance.
  • Whether prospective compensation and benefits arrangements currently under consideration should be structured to comply with anticipated standards or deferred until the closing of your TARP assistance transaction and the issuance of applicable Treasury guidance.
  • Whether you should complete certain pending compensation and benefits actions, such as the declaration and payment of bonuses, the completion of exit programs involving top executives -- and even upcoming shareholder meetings -- before your assistance transaction closes.

If You Will Not Be a TARP Recipient. The executive compensation and governance standards in the stimulus package will affect future benchmarking surveys and other competitive analyses that include TARP recipients in the comparator group. Some may also emerge as "prevailing practices" or "best practices" that influence compensation and governance standards across industries. You may want to understand the extent to which surveys and analyses provided to you reflect the practices of TARP recipients and consider how these practices should influence your own.

The New Standards

No Termination Pay for Top 10 Executives. Under the stimulus package, TARP recipients must prohibit any termination payments, regardless of amount, to the top five proxy officers (or equivalent individuals at private companies) and the next five most highly compensated executives, regardless of the reason for the termination. The only exceptions are payments of earned but unpaid compensation for services and accrued benefits. It is unclear to what extent "accrued benefits" include earned and vested nonqualified deferred compensation.

New Limitations on Bonuses, Retention Awards and Incentive Compensation. The stimulus package prohibits a TARP recipient from paying or accruing bonuses, retention awards or incentive compensation, other than the payment of a long-term restricted stock award that (1) does not fully vest during the period in which any obligation arising from financial assistance provided under the TARP is outstanding and (2) has a value in an amount that does not exceed one-third of the employee's total annual compensation and (3) is subject to such others terms and conditions as the Secretary of the Treasury may determine to be in the public interest. The class of employees to whom the prohibition applies varies based on the amount of TARP assistance received as follows:

  • One employee. The most highly compensated employee, if financial assistance provided under the TARP is less than $25 million.
  • Five employees. The five most highly compensated employees (or higher number determined by the Secretary of the Treasury), if financial assistance provided under the TARP is at least $25 million but less than $250 million.
  • Fifteen employees. The top five proxy officers (or equivalent individuals for private companies) and the 10 next most highly compensated employees (or higher number determined by the Secretary of the Treasury) if financial assistance provided under the TARP is at least $250 million but less than $500 million.
  • Twenty-five employees. The top five proxy officers (or equivalent individuals for private companies) and the 20 next most highly compensated employees (or higher number determined by the Secretary of the Treasury) if financial assistance provided under the TARP is at least $500 million.

The restriction does not apply to bonuses paid or accrued pursuant to a written agreement executed on or prior to Feb. 11, 2009, as determined by the Secretary of the Treasury to be valid. The stimulus packages leaves to the Treasury Department rule-making whether the term "restricted stock" covers more than the typical full-value share award, the definition of annual compensation, the valuation methodology, and the application of the limit to multi-year awards.

No Compensation That Encourages Earnings Manipulation. The stimulus package imposes a broad prohibition on any compensation plan that would encourage anyone to manipulate reported earnings in order to enhance the compensation of any employee. There is currently no further guidance on what it means to "encourage manipulation."

Expanded Compensation Clawback Provision. A TARP recipient's top five proxy officers (and similar individuals at private companies) plus the next 20 most highly paid employees are subject to a clawback of any bonus or incentive compensation paid or accrued based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate.

Policy on Luxury Expenses. The stimulus package requires the board of directors of a TARP assistance recipient to adopt a policy on luxury and excessive expenses, designated by the Secretary of Treasury, which may include entertainment or events, office and facility renovations, aviation and other transportation services and other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or other similar measures in the ordinary course of business. The substance of the policy is left for regulation.

Non-binding Shareholder Say-on-Pay Votes. The stimulus package requires TARP assistance recipients to permit a non-binding "separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the [Securities and Exchange] Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables and any related material)." In a Feb. 20, 2009, letter to the SEC, the Chairman of the SEC, Senate Banking, Housing and Urban Affairs Committee Chairman Dodd stated that this requirement applies to proxy materials filed after Feb. 17, 2009 (other than definitive proxy materials for which preliminary materials were filed before Feb. 17, 2009). While the text of the legislation states that provision for such a vote is to be included in "[a]ny proxy statement or consent or authorization for an annual or other meeting of shareholders", the SEC stated in Compensation and Disclosure Interpretations issued on Feb. 24, 2009, that the requirement applies only to an annual meeting at which directors are elected or a special meeting in lieu of such an annual meeting. It also stated that the say-on-pay requirements would not require a compensation discussion and analysis from small business issuers that are currently exempt from this requirement. In revised Compensation and Disclosure Interpretations issued on Feb. 26, 2009, it clarified that an annual shareholder say-on-pay vote is required whether or not a shareholder initiates such a proposal. It is unclear whether the say-on-pay requirement applies only to those public companies that are subject to the SEC's executive compensation disclosure rules or effectively imposes on private companies comparable shareholder disclosure requirements.

New Compensation Committee Requirements. Under the stimulus package, each TARP recipient (whether public or private) must:

  • Have a compensation committee comprised entirely of independent directors for the purpose of reviewing all employee compensation plans.
  • Require such committee meet at least semi-annually to discuss and evaluate all employee compensation plans in light of an assessment of the risk posed to the TARP assistance recipient from such plans.

For a recipient of $25 million or less in TARP assistance with no common or preferred stock registered under the Securities Exchange Act of 1934, as amended, the legislation states that the entire board of directors is to serve as the compensation committee for this purpose.

Required CEO and CFO Certifications

The stimulus package requires both the CEO and the CFO (or those holding equivalent positions) of a TARP recipient to provide an annual, written certification of compliance with the executive compensation and governance standards. TARP recipients with securities that are publicly traded must furnish these certifications to the SEC with the annual SEC filings. TARP recipients that are not subject to the SEC's reporting and disclosure regime must provide these certifications to the Secretary of the Treasury. Senator Dodd's Feb. 20, 2009, letter to the SEC expresses his view that the law's certification requirements do not apply until Treasury has taken the actions required of it to impose the standards. Existing TARP recipients may continue to be subject to the CEO certification requirements imposed by EESA.

Period During Which Standards are Applicable; Repayment of TARP Assistance

The executive compensation and governance restrictions apply until TARP funds (other than warrants) have been repaid. However, contrary to the terms of many existing TARP assistance agreements, the stimulus package permits TARP recipients to terminate the limitations on executive pay by repaying any TARP funds, in consultation with their primary federal regulator, without regard to contractual waiting periods and without having to raise equivalent funds from non-governmental sources. Once the TARP funds are repaid, the Government is required to liquidate any warrants associated with the assistance at the current market price. As a result, TARP recipients will have greater control over the period during which they are subject to the associated operating constraints. They will also be able to reduce potential shareholder dilution which outstanding warrants represent.

Treasury Review of Prior Payments to Top 25 Employees

The stimulus package requires the Secretary of the Treasury to review bonuses, retention awards and other compensation paid to the top five proxy officers (or equivalent individuals for private companies) and the next 20 most highly compensated employees of each entity that received TARP assistance before Feb. 17, 2009. Treasury must determine whether any such payments were inconsistent with the purposes of the TARP or otherwise contrary to the public interest. In the event of such a determination, Treasury must negotiate with the TARP recipient and the payment recipient for appropriate reimbursement to the U.S. Government.

Prior Restrictions Remain in Place

The restrictions on executive compensation applicable to TARP recipients under EESA and the applicable assistance agreements generally remain in place. Thus, the $500,000 cap on deductible compensation, whether imposed by EESA or agreed to as part of the assistance package, continues to apply.

Other Observations

The stimulus package imposes minimum requirements. It does not preclude Treasury from establishing additional or more rigorous standards, nor does it necessarily override standards imposed in existing Treasury regulations and other guidance. It is not clear whether the new minimum standards took effect on Feb. 17, 2009, or only take effect when Treasury issues implementing regulations. In his Feb. 20, 2009, letter to the SEC, Senator Dodd expressed his view that Treasury must act before the standards take effect.


The stimulus package imposes significant new compliance obligations, requiring immediate attention, on companies that have received or will receive financial assistance under the TARP. Compensation, governance and risk management practices which TARP recipients adopt to address these obligations may emerge as prevailing practices or best practices for financial services companies and other businesses. As a result, all employers have an interest in Treasury's implementation of the requirements of the stimulus package.

Please click here to view Comparison of Executive Compensation and Governance Provisions EESA and the Stimulus Package table.