Under the Interim Final Rule, Treasury has created a formal regulatory framework for compensation standards and an oversight position, in the form of a Special Master, to police the implementation of those policies by recipients of TARP assistance. The new Interim Final Rule:

  • Places limits on executive compensation for certain executives and highly compensated employees by limiting payments of bonuses and golden parachutes, and imposing a clawback for bonuses paid on “materially inaccurate performance criteria.”
  • Appoints a Special Master to review compensation plans at firms receiving “Exceptional Assistance”, a group that includes AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial.
  • Implements and expands on certain American Reinvestment and Recovery Act (ARRA) provisions, including the risk analysis of compensation and luxury expenditure policies for all TARP firms, and the annual non-binding shareholder "Say on Pay" votes required under ARRA.
  • Sets additional compensation and governance standards designed to improve accountability and disclosure, including additional disclosure of perks and the use of compensation consultants, and a prohibition on tax gross-ups.  

Secretary Geithner also announced the intention of the Obama Administration to work for the passage of more comprehensive legislation relating to executive compensation. Secretary Geithner first urged passage of legislation that would grant the SEC authority to require companies to give shareholders a non-binding “say on pay” vote. In support of the legislation, Secretary Geithner released a fact sheet that suggests that, along with “say on pay” votes, shareholders should be entitled to an annual non-binding vote on golden parachutes. The Fact Sheet also suggests that companies should be able to include additional resolutions on specific compensation decisions.

Second, he urged that Congress grant the SEC the power to ensure that compensation committees are more independent. On this second proposal, Secretary Geithner suggested that independence standards such as those required for audit committees under the Sarbanes-Oxley Act be imposed on compensation committees, and that compensation committee be given the responsibility and resources to hire independent compensation consultants and outside counsel.

In announcing the principles to underlie both legislative and regulatory reform of compensation practices, Secretary Geithner stated that, “[t]his financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.”

The key principles Secretary Geithner announced today are:

  • Compensation plans should properly measure and reward performance.
  • Compensation should be structured to account for the time horizon of risks.
  • Compensation practices should be aligned with sound risk management.
  • Reexamination of whether golden parachutes and supplemental retirement packages align the interest of executives and shareholders.
  • Promotion of transparency and accountability in the process of setting compensation.  

Chairman Schapiro’s statement provided greater detail on her previously announced [] intention to address disclosure relating to risk management in the context of setting compensation. Specifically, Chairman Schapiro stated that the SEC is currently considering several proposals greater disclosure concerning:

  • How a companies and boards manage risks.
  • A company’s overall compensation approach.
  • Potential conflicts of interest by compensation consultants, including disclosure of relationships between the consultants and the company and their affiliates.
  • Director nominees, including their experience and qualifications to serve on the board or on particular board committees and why a board has chosen its particular leadership structure.  

Chairman Schapiro stated that “[w]hile these proposals would not dictate particular compensation decisions, they would lead companies to analyze how compensation impacts risk taking and the implications for long term corporate health of the behavior they are incenting.”