On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA amends Section 111 of the Emergency Economic Stabilization Act of 2008 (“EESA”), which was the source of several sets of executive compensation standards that were developed under the Troubled Asset Relief Program (“TARP”). The new executive compensation provisions in ARRA are an amalgam of the various standards promulgated under TARP and the recent executive compensation guidelines issued by the Obama administration on February 4, 2009. See “Treasury Department Announces New Restrictions on Executive Compensation,” 21st Century Banking & Commerce® Alert (Feb. 6, 2009). Although tougher than the original TARP provisions in some respects, the new standards do not incorporate all of the provisions in the Obama administration’s recent executive compensation guidelines. Most importantly, the guidelines’ $500,000 cap on compensation has not been enacted. The Department of the Treasury (the “Treasury”) is directed to issue regulations to implement the new executive compensation provisions under ARRA.  

Application of the Executive Compensation Restrictions  

The new rules apply to all “TARP recipients,” which refers to any entity that has received or will receive financial assistance under TARP. In this regard, the standard Securities Purchase Agreement that the Treasury has used for its capital purchases provides that the Treasury may unilaterally amend any provision of the agreement to the extent required to comply with any changes after the date of the agreement in applicable federal law. Therefore, the Treasury may seek to apply the new rules retroactively to all TARP recipients to date, as well as to future recipients. In response to concerns about the retroactive application of new executive compensation limitations, ARRA includes a provision that is intended to make it easier for TARP recipients to repay TARP assistance.

Financial institutions are required to abide by the executive compensation and corporate governance restrictions under TARP (as amended by ARRA) for the period in which any obligation arising out of TARP remains outstanding (but does not include any period in which the federal government holds only warrants to purchase the common stock of the TARP recipient) (the “TARP obligation period”). The restrictions generally apply to senior executive officers (“SEOs”), who are defined as the five most highly compensated executives of a public company whose compensation is required to be disclosed pursuant to SEC rules, or their equivalent counterparts in non-public companies. Depending on the amount of funds received by the company, a varying number of additional highly compensated employees may be covered. ARRA, however, does not provide a method for determining who will be considered “highly compensated” for purposes of these new compensation restrictions.  


ARRA requires that all TARP recipients adhere to a number of executive compensation standards during the TARP obligation period, which are discussed in greater detail below.  

Unnecessary Risk  

The compensation of SEOs must be limited to exclude incentives to take unnecessary and excessive risks that threaten the value of the institution during the TARP obligation period, as was also required under EESA.  

Clawbacks and Manipulation of Reported Earnings  

ARRA’s clawback requirement, which broadens the original EESA provision, calls for the recovery of any bonus, retention award or incentive compensation paid to an SEO and any of the next 20 most highly compensated employees if the compensation was based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate. ARRA also prohibits any compensation plan that encourages the manipulation of reported earnings to enhance the compensation of any employee.  

Golden Parachute Payments  

TARP recipients are prohibited from making any golden parachute payment to an SEO or any of the next 5 most highly compensated employees during the TARP obligation period. Under ARRA, a golden parachute payment has been defined to mean any payment to an SEO who departs a company for any reason, except payments for services performed or benefits accrued. This is a significant tightening of the golden parachute rules promulgated under EESA, which were generally much less restrictive in regard to such payments.  

Bonus and Incentive Compensation Restrictions  

TARP recipients are prohibited from paying or accruing bonuses, retention awards or incentive compensation during the TARP obligation period, except for the payment of long-term restricted stock that (i) does not fully vest until the TARP obligation period is completed, (ii) has a value in an amount that is no greater than one-third of the total amount of annual compensation of the employee receiving the restricted stock and (iii) is subject to any other terms the Secretary of the Treasury (the “Secretary”) determines are in the public interest. The employees subject to this prohibition vary depending on how much financial assistance the institution has received under TARP, as follows: see table

The prohibition on incentive compensation has an important exception for any bonus payment required to be paid pursuant to a written employment contract that was executed on or before February 11, 2009, provided that the Secretary or his designee has the authority to determine which employment contracts are “valid” for this purpose.  

Furthermore, ARRA instructs the Secretary to review the bonuses, retention awards and incentive compensation paid to SEOs and the next 20 highest compensated executives before the enactment of ARRA and to determine whether any of those payments were inconsistent with the purposes of TARP or otherwise contrary to the public interest. If so, the Secretary is instructed to “negotiate” with the TARP recipient and the employee for “appropriate reimbursement” to the federal government.  

Deduction Limitations  

For the duration of the TARP obligation period, each TARP recipient is subject to the deduction limitations of Section 162(m)(5), added to the Internal Revenue Code by EESA. This provision generally imposes a $500,000 limitation on the annual deduction an institution may take for compensation paid to certain executive officers and does not contain any exclusion for performance-based pay that is otherwise available under Section 162(m).

Certification of Compliance  

The chief executive officer and chief financial officer of each TARP recipient must provide a written certification which states that the institution has complied with all the executive compensation requirements in ARRA. This certification is provided to the Securities and Exchange Commission (“SEC”) if the institution is publicly traded, or to the Secretary if the institution is not publicly traded.  


ARRA also requires TARP recipients to put into place certain corporate governance measures, which are discussed in greater detail below.  

Limitation on Luxury Expenditures  

The board of directors of any TARP recipient must put in place a company-wide policy on excessive or luxury expenditures, as identified by the Secretary. Excessive expenditures may include expenditures on entertainment or events, office and facility renovations, aviation and other transportation services and any other activities or events that are not reasonable expenditures for staff development, performance incentives or similar measures. This provision enacts the expenditures policy described in the guidelines previously issued by the Obama administration.  

Board Compensation Committee  

TARP recipients must establish a Board Compensation Committee (the “Committee”), comprised entirely of independent directors, to review employee compensation plans. This Committee must meet at least twice a year and evaluate compensation plans in light of any risk posed by the plans to the TARP recipient. If the TARP recipient has no common or preferred stock registered under the Securities Exchange Act of 1934 and has received less than $25 million in TARP assistance, then its board of directors may conduct the evaluation in lieu of a separate Committee.  

Shareholder Vote on Executive Compensation  

A nonbinding shareholder vote on executive compensation, commonly known as “say on pay,” has now become law – at least with respect to TARP recipients. The shareholders of TARP recipients must be given a separate vote on the compensation of executives, as disclosed in the compensation portion of proxy statements, including the Compensation Discussion and Analysis section and the related compensation tables. This requirement, in a different context, had been part of the Obama administration’s guidelines. The SEC has been given a year from the enactment of ARRA to issue final rules relating to this provision.


The new executive compensation restrictions streamline the preexisting combination of guidelines and interim final rules, but also inject new uncertainty as to what is required to remain in compliance with TARP. In some cases, it is not clear how previous Treasury rules and guidance will square with ARRA. To that end, it is likely that Treasury will promptly issue new regulations comprehensively addressing the executive compensation restrictions applicable to TARP recipients.  

Some other executive compensation restrictions that were part of the Senate version of ARRA were dropped or modified during the Congressional conference process, such as capping the executive compensation of all TARP recipients at $400,000 (the salary the President receives) and retroactively recovering bonuses that exceeded $100,000. It remains to be seen whether these further restrictions on executive compensation will be resurrected in the future. The guidelines promulgated by President Obama proposed an executive compensation conference hosted by the Treasury that has not yet been scheduled. It is possible that a new approach to compensation restrictions may arise out of discussions conducted at the conference.