On the heels of substantial criticism that the U.S. Treasury's Troubled Asset Relief Program (TARP) did not go far enough to curb excessive compensation being paid to executives of institutions receiving taxpayer assistance, the American Recovery and Reinvestment Act of 2009 (ARRA) imposes stricter restrictions on executive compensation for past and future TARP recipients. ARRA's new executive compensation restrictions most likely will compel TARP recipients to make significant changes to their executive compensation practices.

Each institution that has received or will receive TARP funds must comply with "appropriate standards for executive compensation and corporate governance" to be established by the U.S. Treasury. The CEO and CFO of a TARP recipient must complete a written certification of compliance with the standards. At a minimum, the standards must include:

  • limits on incentive compensation to discourage senior executive officers (SEOs) from taking unnecessary and excessive risks that threaten the value of the institution;

  • clawback provision for any incentive compensation paid to SEOs or the next 20 most highly compensated employees based on criteria that are later found to be materially inaccurate;

  • prohibition on any severance or golden parachute payments made to an SEO or any of the next five most highly compensated employees;

  • prohibition on paying or accruing any incentive compensation (other than restricted stock awards up to 1/3 of annual compensation) to certain SEOs and highly compensated employees (depending on the dollar amount of TARP assistance received);

  • prohibition on any compensation plan that would encourage the manipulation of the reported earnings of a TARP recipient; and

  • establishment of a Board Compensation Committee, composed entirely of independent directors, that must meet at least semi-annually to review compensation plans.

In addition to the foregoing standards, which build upon the executive compensation standards originally announced when the TARP was introduced, ARRA imposes a variety of other measures intended to limit the amount of compensation payable to executives of TARP recipients. These measures include:

  • "Say on Pay" Resolution. Executive compensation must be submitted to a non-binding "say on pay" shareholder resolution.
  • Luxury Expenses. The board of directors must adopt a company-wide policy on excessive and luxury expenditures, including entertainment, office renovations, aviation, and corporate travel.

    For further information on the Emergency Economic Stabilization Act, please contact:

John L. Culhane, Jr., Banking and Consumer Financial Services
Dominic J. De Simone, Co-Chair, Distressed Real Estate Initiative
Joseph A. Fanone, Public Finance Department
Thomas A. Hauser, Business and Finance Department
Alan S. Kaplinsky, Banking and Consumer Financial Services
Justin P. Klein, Business and Finance Department
Vincent J. Marriott III, Bankruptcy, Reorganization and Capital Recovery Group
Mary J. Mullany, Business and Finance Department
Brian M. Pinheiro, Employee Benefits and Executive Compensation Group
Blake K. Wade, Housing Group

Prior EESA Alerts

February 13, 2009
Treasury Secretary Outlines New Financial Stability Plan

February 4, 2009
Significant New Restrictions on Executive Compensation for TARP Recipients

January 27, 2009
Special Inspector General of TARP to Begin Oversight Initiative

January 16, 2009
Treasury Department Issues Term Sheet and Announces February 13, 2009 Deadline for Subchapter S Corporations to Participate in the Capital Purchase Program

January 6, 2009
Federal Reserve Announces Additional Details for its Term Asset-Backed Securities Loan Facility (TALF)

December 12, 2008
Treasury Department Issues Closing Documents for Private Financial Institutions to Participate in the Capital Purchase Program

December 1, 2008
SEC Staff Issues Sample Guidance to CPP Participants Filing Proxy Statements

November 26, 2008
Federal Reserve and Treasury Announce Two New Programs To Boost Credit Availability

November 18, 2008
Treasury Department Issues Term Sheet and Announces December 8, 2008 Deadline for Private Financial Institutions to Participate in the Capital Purchase Program

November 14, 2008
Kashkari Details Future TARP Deployment Strategy

November 12, 2008
Treasury Secretary Details TARP Strategy 

November 7, 2008
Treasury Department Announces Solicitation Regarding Asset Management Services in Connection with EESA Capital Purchase Program

November 6, 2008
Beware: Is There a "Trojan Horse" in the Capital Purchase Program Securities Purchase Agreement?

October 23, 2008
Kashkari Testifies Before Senate Banking Committee

October 14, 2008
Treasury, Federal Reserve, and FDIC Joint Statement Capital Purchase Program

October 13, 2008
Remarks on TARP to Institute of International Bankers

October 7, 2008
Emergency Economic Stabilization Act of 2008/TARP

October 6, 2008
Employee Benefits and Executive Compensation Issues Connected to Emergency Economic Stabilization Act of 2008

October 6, 2008
Emergency Economic Stabilization Act of 2008

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