As has been widely reported, the 2009 Economic Stimulus Act includes some strict limits on compensation for top executives of recipients of funds from the "Troubled Assets Relief Program" (TARP). A TARP funds recipient cannot a) deduct (for tax purposes) compensation to its top executives that exceed $500,000; b) make a golden parachute payment to top executives; and c) pay a bonus to top executives. These restrictions will continue until the TARP recipient meets all of the financial obligations under TARP, the main obligation being the repayment to the government of the TARP funds.

Everyone would hope that the repayment would come soon (although a quick repayment is looking less and less likely). But, James Shanley (Masuda, Funai's Of Counsel attorney specializing in tax law) believes that the end of the TARP limits may not be the end of restrictions on compensation. James notes that the TARP restrictions not only deal with the amount and type of compensation, but also set forth guidelines and procedures on establishing compensation levels and recovering compensation.

For example, a TARP recipient is required to recover compensation to a top executive if the payment was based on statements of earnings, revenues, gains, or other criteria later found to be materially inaccurate. This "claw back" is likely a response to public outrage against payments made to individuals who placed risky bets that produced short-term profits but now have been shown to threaten the survival of their employer.

A TARP recipient is also prohibited from establishing any compensation plan that encourages manipulation of reported earnings of the TARP recipient to enhance compensation of its employees. The economic downturn has revealed instances of such manipulation that rewarded employees for risky and questionable decisions.

A TARP recipient must adopt company-wide policies regarding excessive or luxury expenditures, such as entertainment, office renovations, and other unreasonable expenditures. Publicly traded TARP recipients must comply with disclosure rules of the Securities and Exchange Commission and permit a nonbinding shareholder vote to approve executive compensation.

A TARP recipient must also establish a Board Compensation Committee of independent directors to evaluate employee compensation. (If the TARP recipient is private and has received less than $25,000,000 of TARP funds, the Board of Directors can perform this responsibility.) Another problem that the downturn has revealed is the pattern of excessive payments to executives and employees authorized by their friends and associates on the Board.

James Shanley believes that even after the TARP funds are repaid and this recession is history (which can't be too soon), the guidelines and procedures for establishing compensation laid out by the 2009 Economic Stimulus Act may remain with us. The true test on the effectiveness and sustainability of the TARP compensation rules will be with the return of prosperity (which also can't be too soon). It will be interesting to see if James is correct and these restrictions and procedures survive.