On February 4, the White House announced that the U.S. Treasury Department will be issuing new guidelines (Guidelines) on executive compensation affecting companies that are receiving financial assistance from the U.S. government under the Troubled Asset Relief Program (TARP).
Pursuant to the Guidelines, all companies that have received or will receive government assistance under TARP must provide initial and annual certifications to the Treasury that such company has strictly complied with statutory, Treasury and contractual executive compensation restrictions. In addition, the compensation committees must detail how their senior executive compensation program discourages excessive and unnecessary risk-taking.
The Treasury will issue proposed guidance, subject to public comment, with respect to executive compensation requirements as they relate to future generally available capital access programs (i.e., programs that have the same terms for all recipients). Components of this proposal will include the following:
- Senior executives at such companies will be limited to $500,000 in total annual compensation plus restricted stock unless such restriction is waived with full public disclosure and a non-binding “say on pay” shareholder resolution (if such vote is requested). All such companies must review and disclose the reasons that compensation arrangements of both the senior executives and other employees discourage excessive and unnecessary risk-taking.
- Such companies will be required to “claw back” bonuses and incentive compensation from up to 25 senior executives if the executives are found to have knowingly engaged in providing inaccurate information relating to the financial statements or performance metrics used to calculate their own incentive pay.
- The top five senior executives at such companies will not be allowed a “golden parachute” payment greater than one year’s compensation.
- The boards of directors of such companies will be required to adopt a company policy relating to approval of luxury expenditures.
With respect to companies that will receive “exceptional assistance” from the Treasury (i.e., such company is receiving more assistance than is widely available under a standard Treasury assistance program), senior executives at such companies will be limited to $500,000 in total annual compensation except for restricted stock awards. Payments to executives at such companies in excess of $500,000 annually must be made in restricted stock or other similar long-term incentive arrangements, and such restricted stock generally may vest only when the U.S. government has been repaid with interest. Moreover, companies that receive exceptional assistance in the future must have in place a process enabling such company to “claw back” bonuses and incentive compensation from any of the company’s top twenty-five senior executives. Finally, future exceptional assistance recipients will be required to (i) ban golden parachute payments upon severance from employment for the top ten senior executives at such companies; and (ii) limit golden parachute payments to the next twenty-five senior executives (at a minimum) to one year’s compensation upon severance from employment. It appears that these rules will not apply retroactively to companies that have already received extraordinary assistance.
Finally, the Guidelines detail certain actions the White House and the Treasury believe should be undertaken in efforts to promote long-term regulatory reform with respect to compensation structures and risk management. Among those items to be considered include: (1) a requirement that all compensation committees of public financial institutions review and disclose strategies for aligning compensation with sound risk management; (2) use of long-term perspective in the development of compensation packages for top executives; (3) utilization of “say on pay” shareholder resolutions with respect to executive compensation; and (4) a conference hosted by the Treasury with shareholder advocates, major public pension and institutional investor leaders, policy makers, executives, academics and others on executive pay reform at financial institutions.