5 February 2009
http://www.treasury.gov/press/releases/tg15.htm
February 4, 2009
TG-15
Treasury Announces New Restrictions On Executive Compensation
Today, the Treasury Department is issuing a new set of guidelines on
executive pay for financial institutions that are receiving government assistance
to address our current financial crisis. These measures are designed
to ensure that public funds are directed only toward the public interest
in strengthening our economy by stabilizing our financial system and not
toward inappropriate private gain. The measures announced today are designed
to ensure that the compensation of top executives in the financial community
is closely aligned not only with the interests of shareholders and financial
institutions, but with the taxpayers providing assistance to those companies.
The Treasury guidelines on executive pay seek to strike the correct
balance between the need for strict monitoring and accountability on executive
pay and the need for financial institutions to fully function and attract
the talent pool that will maximize the chances of financial recovery and
taxpayers being paid back on their investments. The proposals below,
such as emphasizing restricted stock that vests as the government is repaid
with interest, seek to strike exactly that balance.
The guidelines distinguish between banks participating in any new generally
available capital access program and banks needing "exceptional
assistance." Generally available programs have the same terms for all
recipients, with limits on the amount each institution may receive and specified
returns for taxpayers. The goal of these programs is to help ensure the financial
system as a whole can provide the credit necessary for recovery, including
providing capital to smaller community banks that play a critical role in
lending to small businesses, families and others. The previously announced
Capital Purchase Program is an example of a generally available capital access
program.
If a firm needs more assistance than is allowed under a widely available
standard program, then that is exceptional assistance. Banks falling under
the "exceptional assistance" standard have bank-specific negotiated agreements
with Treasury. Examples include AIG, and the Bank of America and Citi
transactions under the Targeted Investment Program.
As part of President Obama's efforts to promote systemic regulatory
reform, the standards today mark the beginning of a long-term effort to examine
both the degree that executive compensation structures at financial institutions
contributed to our current financial crisis and how corporate governance
and compensation rules can be reformed to better promote long-term value
and growth for shareholders, companies, workers and the economy at large
and to prevent such financial crises from occurring again.
I.
COMPLIANCE AND
CERTIFICATION:
All Companies Receiving Government Assistance Must Ensure Compliance
with Executive Compensation Provisions: The chief executive
officers of all companies that have to this point received or do receive
any form of government assistance must provide certification that the companies
have strictly complied with statutory, Treasury, and contractual executive
compensation restrictions. Chief executive officers must re-certify
compliance with these restrictions on an annual basis. In addition,
the compensation committees of all companies receiving government assistance
must provide an explanation of how their senior executive
compensation arrangements do not encourage excessive and unnecessary
risk-taking.
II.
ENHANCED CONDITIONS ON EXECUTIVE COMPENSATION GOING
FORWARD:
-
Companies Receiving Exceptional Financial Recovery Assistance:
-
Limit Senior Executives to $500,000 in Total Annual Compensation
Other than Restricted Stock: Current
programs providing exceptional assistance to financial institutions forbid
recipients of government funds from taking a tax deduction for senior executive
compensation above $500,000. Today's guidance takes this restriction further
by limiting the total amount of compensation to no more than $500,000 for
these senior executives except for restricted stock awards.
-
Any Additional Pay for Senior Executives Must Be in Restricted Stock
that Vests When the Government Has Been Repaid with Interest:
Any pay to a senior executive of a company receiving
exceptional assistance beyond $500,000 must be made in restricted stock
or other similar long-term incentive arrangements. The senior executive
receiving such restricted stock will only be able to cash in either after
the government has been repaid including the contractual dividend
payments that ensure taxpayers are compensated for the time value of their
money or after a specified period according to conditions that consider
among other factors the degree a company has satisfied repayment obligations,
protected taxpayer interests or met lending and stability standards. Such
a restricted stock strategy will help assure that senior executives of companies
receiving exceptional assistance have incentives aligned with both the long-term
interests of shareholders as well as minimizing the costs to taxpayers.
-
Executive Compensation Structure and Strategy Must be Fully Disclosed
and Subject to a "Say on Pay" Shareholder Resolution:
The senior executive compensation structure and the
rationale for how compensation is tied to sound risk management must be submitted
to a non-binding shareholder resolution. There are no "Say on Pay" provisions
in the existing programs.
-
Require Provisions to Clawback Bonuses for Top Executives Engaging
in Deceptive Practices: Under the existing programs
providing exceptional assistance, only the top five senior executives were
subject to a clawback provision. Going forward, a company receiving
exceptional assistance must have in place provisions to claw back bonuses
and incentive compensation from any of the next twenty senior executives
if they are found to have knowingly engaged in providing inaccurate information
relating to financial statements or performance metrics used to calculate
their own incentive pay.
-
Increase Ban on Golden Parachutes for Senior Executives:
The existing programs providing exceptional assistance to
financial institutions prohibited the top five senior executives from receiving
any golden parachute payment upon severance from employment, a ban that will
be expanded to include the top ten senior executives. In addition,
and at a minimum, the next twenty-five executives will be prohibited from
receiving any golden parachute payment greater than one year's compensation
upon severance from employment.
-
Require
Board of Directors' Adoption of Company Policy Relating to Approval of Luxury
Expenditures: The boards of directors of
companies receiving exceptional assistance from the government must adopt
a company-wide policy on any expenditures related to aviation services, office
and facility renovations, entertainment and holiday parties, and conferences
and events. This policy is not intended to cover reasonable expenditures
for sales conferences, staff development, reasonable performance incentives
and other measures tied to a company's normal business operations. These
new rules go beyond current guidelines, and would require certification by
chief executive officers for expenditures that could be viewed as excessive
or luxury items. Companies should also now post the text of the expenditures
policy on their web sites.
-
Financial Institutions Participating in Generally Available
Capital Access Programs:
The Treasury intends to issue proposed guidance subject to public
comment on the following executive compensation requirements relating to
future generally available capital access programs.
-
Limit Senior Executives to $500,000 in Total Annual Compensation
Plus Restricted Stock Unless Waived with Full Public Disclosure
and Shareholder Vote: Companies that participate in generally
available capital access programs may waive the $500,000 plus restricted
stock rule only by disclosure of their compensation and, if requested, a
non-binding "say on pay" shareholder resolution. All firms participating
in a future capital access program must review and disclose the reasons that
compensation arrangements of both the senior executives and other employees
do not encourage excessive and unnecessary risk taking. Under the current
Capital Purchase Program, the companies were only required to review and
certify that the top five executives' compensation arrangements did not encourage
excessive and unnecessary risk-taking.
-
Require Provisions to Clawback Bonuses for Top Executives Engaging
in Deceptive Practices: The same clawback provision
that applies to companies receiving exceptional assistance will apply to
those in generally available capital access programs. Thus, in addition
to the clawback provision applicable to the top five executives as under
the Capital Purchase Program, a company receiving assistance must have in
place provisions to claw back bonuses and incentive compensation from any
of the next twenty senior executives if they are found to have knowingly
engaged in providing inaccurate information relating to financial statements
or performance metrics used to calculate their own incentive
pay.
-
Increase Ban on Golden Parachutes for Senior Executives:
Even under generally available capital access programs,
the golden parachute ban will be strengthened: Upon a severance from
employment, the top five senior executives will not be allowed a golden parachute
payment greater than one year's compensation, as opposed to three years under
the current Capital Purchase Program.
-
Require Board of Directors' Adoption of Company Policy
Relating to Approval of Luxury Expenditures: This
policy will be the same for companies accessing generally available capital
programs as it is for those receiving exceptional assistance. There are no
guidelines on luxury expenditures under the current Capital Purchase
Program.
[These new standards will not apply retroactively to existing
investments or to programs already announced such as the Capital Purchase
Program and the Term Asset-Backed Securities Loan Facility.]
III. LONG-TERM REGULATORY REFORM: COMPENSATION STRATEGIES
ALIGNED WITH PROPER RISK MANAGEMENT AND LONG-TERM VALUE AND
GROWTH:
Even as we work to recover from current market events, it is not too
early to begin a serious effort to both examine how company-wide compensation
strategies at financial institutions not just those related to top
executives may have encouraged excessive risk-taking that contributed
to current market events and to begin developing model compensation policies
for the future. Such steps should include:
-
Requiring all Compensation Committees of Public Financial
Institutions to Review and Disclose Strategies for Aligning Compensation
with Sound Risk-Management: The Secretary of the Treasury
and the Chairman of the Securities and Exchange Commission should work together
to require compensation committees of all public financial institutions
not just those receiving government assistance to review and disclose
executive and certain employee compensation arrangements and explain how
these compensation arrangements are consistent with promoting sound risk
management and long-term value creation for their companies and their
shareholders.
-
Compensation of Top Executives Should Include Incentives
That Encourage a Long-Term Perspective: Over the
last decade there has been an emerging consensus that top executives should
receive compensation that encourages more of a long-term perspective on creating
economic value for their shareholders and the economy at large. One idea
worthy of serious consideration is requiring top executives at financial
institutions to hold stock for several years after it is awarded before it
can be cashed-out as this would encourage a more long-term focus on the economic
interests of the firm.
-
Pass Say on Pay Shareholder Resolutions on Executive
Compensation: Even beyond companies receiving
financial recovery assistance, owners of financial institutions the
shareholders should have a non-binding resolution on both the levels
of executive compensation as well as how the structure of compensation incentives
help promote risk management and long-term value creation for the firm and
the economy as a whole.
-
White House -Treasury Conference on Long-Term Executive
Pay Reform: The Secretary of the Treasury will host
a conference with shareholder advocates, major public pension and institutional
investor leaders, policy-makers, executives, academics, and others on executive
pay reform at financial institutions. Treasury will seek testimony,
comment, and white papers on model executive pay initiatives in the cause
of establishing best practices and guidelines on executive compensation
arrangements for financial institutions.
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