June 10, 2009
TG-165
Interim Final Rule on TARP Standards for Compensation and Corporate
Governance
For a copy of the regulations, click
here
[PDF].
1.
Limits Executive Compensation for Certain Executives
and Highly Compensated Employees at Companies Receiving TARP
Funds
·
Limits Bonus Payments to Protect Taxpayer
Investments
·
Curtails the Payment of Golden Parachutes
·
Imposes a Clawback for Any Bonus Based on Materially Inaccurate
Performance Criteria
2.
Appoints a Special Master to Review Compensation Plans
At Firms Receiving Exceptional Assistance
·
Responsible for Reviewing Any Compensation for Senior Executive
Officers and Most Highly Paid Employees At Firms Receiving Exceptional Assistance
With Authority to Disapprove Plans Where Salary or Other Compensation
Is Inappropriate, Unsound or Excessive
·
Must Approve Compensation Structure for Any Executive Officers
and the 100 Most Highly Paid Employees at Those Firms
·
Possesses Authority to Negotiate Reimbursements on Payments
Made Before February 17, 2009
·
Makes Determinations Based on A Clear Set of
Principles
3.
Implements and Expands Upon Key Recovery Act Provisions
Consistent With February 4th Proposals
·
Extends Required Risk Analysis of Compensation to All Employees
of TARP Firms
·
Requires Luxury Expenditure Policies for All TARP
Firms
·
Institutes "Say on Pay" Requirement for All TARP
Firms
4.
Sets Additional Compensation and Governance Standards
to Improve Accountability and Disclosure
·
Prohibits Tax Gross-Ups
·
Requires Additional Perk Disclosure
·
Mandates Disclosure of Compensation Consultants
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1.
Limitations on Executive Compensation for Companies
Receiving TARP Assistance: The
interim final rule establishes certain standards for executive compensation
practices at firms receiving TARP assistance, in order to fully protect the
interests of taxpayers and mandate compensation practices that maximize the
value of the firm for shareholders.
·
Limits Bonus Payments to Senior Executive Officers and
Highly Compensated Employees to Protect Taxpayer
Investments: The new regulations
limit bonuses paid to senior executive officers defined to include
the "named executive officers" identified in the company's annual compensation
disclosures and to a specified number of t he most highly compensated
employees of TARP recipients to one-third of total compensation, implementing
the provisions passed by Congress. (The rule defines "most highly compensated"
employees by reference to total annual compensation as calculated under the
securities regulations, in order to most accurately capture the amounts earned
by these executives each year. The number of most highly
compensated employees covered by the limit depends upon the amount of financial
assistance the company has received. For those institutions receiving over
$500 million in assistance, the five senior executive officers and the 20
most highly compensated employees are covered.) At the same time, the rules
encourage firms to pay salary in the form of stock that must be held for
a long period of time and may not be entirely converted to cash until TARP
funds are repaid, aligning executives' incentives with those of shareholders
and taxpayers and effectively ensuring that executives experience a "clawback"
effect if positive results prove illusory and the stock drops in
value.
o Prevents Abuse of the Exception for
Commissions: Although the rule contains
an exception from the bonus limitation for payments of certain types of
"commissions," the rule also minimizes abuse of the exception by limiting
commissions to amounts payable under programs similar to commission programs
already in place as of February 17, 2009. At firms re
ceiving "exceptional assistance" under TARP, these payments and compensation
structures for executive officers and the most highly compensated employees
will also be subject to review by the newly appointed Special Master for
TARP Executive Compensation.
·
Curtails the Payment of "Golden
Parachutes." The Recovery Act expanded
the original EESA's limits on golden parachutes, prohibiting any golden parachute
payment to a senior executive officer or any of the next 5 most highly
compensated employees. While the Recovery Act limited the definition of golden
parachutes to payments for an employee's departure for any reason , today's
rule also includes payments made in connection with a change in control of
the company.
·
Imposes a Clawback for Any Bonus Based on Materially
Inaccurate Performance Criteria.
Although the original EESA required a clawback provision applicable
only to amounts paid to senior executive officers, the Recovery Act mandates
that bonuses paid to senior executive officers and next 20 most highly
compensated employees be subject to a clawback if the payment was based on
materially inac curate performance criteria. Today's rule also requires that
the TARP recipient actually exercise its clawback rights in such a case unless
the TARP recipient can demonstrate that it would be unreasonable to do so
(for example, if the expense of enforcing the clawback right exceeds the
benefits of doing so).
2. Appoints a Special Master
to Ensure Compensation Plans Are Consistent with the Public
Interest: As part of the rule, we'll
be announcing the appointment of Kenneth R. Feinberg as the Special Master
for TARP Executive Compensation. In this role, Mr. Feinberg
a highly-respected mediator widely praised for his leadership of the
September 11th Victim Compensation Fund will review payments
and compensation plans for the executives and the 100 most highly compensated
employees of TARP recipients that have received exceptional assistance to
ensure that compensation is structured in a way that gives those employees
incentives to maximize long-term shareholder value and protect taxpayer
interests. Companies receiving exceptional financial assistance include those
receiving assistance under the Programs for Systemically Significant Failing
Institutions, the Targeted Investment Program, the Automotive Industry Financing
Program, and currently include AIG, Citigroup, Bank of America, Chrysler,
GM, GMAC and Chrysler Financial.
·
Responsible for Reviewing Any Compensation for Senior
Executive Officers and Next 20 Most Highly Compensated Employees at Firms
Receiving Exceptional Assistance: At firms receiving
exceptional assistance, the Special Master will be charged with reviewing
and approving any compensation proposed to be paid to any employee subject
to the Recovery Act's bonus restrictions (for these firms, this generally
will include the five senior e xecutive officers and the 20 next most highly
paid executives).
·
Must Approve Compensation Structure for Senior Executive
Officers and the 100 Most Highly Paid Employees at Those
Firms: In light of the need for long-term reform of
the structure of executive compensation and the incentives that pay gives
to top executives, the Special Master will also be empowered to review and
approve the structure of compensation for the 100 most highly paid employees
that are not subject to the bonus res trictions and any executive officers
that are not among the 100 most highly paid employees. Where the Special
Master finds that the structure of compensation is inconsistent with the
purposes of EESA, the TARP or the public interest, the Special Master may
disapprove the plan and require the company to resubmit.
·
Authority to Disapprove Compensation Arrangements for
Companies with Exceptional Assistance Where Salary or Other Compensation
Is Found to be Inappropriate, Unsound or Excessive:
If the Special Master finds the salaries or any other compensation of those
executives or employees subject to the bonus limitations in companies receiving
exceptional assistance to be excessive, inappropriate or designed to encourage
unsound risk-ta king, the Special Master has the authority to disapprove
the arrangement and require the company to resubmit taking account of the
deficiencies found by the Special Master. For any other
of the executive officers and the 100 most highly paid employees, the Special
Master may review the structure of the entire compensation
package.
·
"Safe Harbor" Guidance on Compensation Payments and
Structure: Consistent with the Treasury's February 4
guidance on executive compensation at TARP recipients, the Special Master
will automatically approve proposed compensation to employees of TARP recipients
receiving exceptional assistance so long as the employee's total annual
compensation is not more than $500,000, with any additional compensation
paid in the form of long-term restricted stock. Providing
recipients with a clear "safe harbor" rule will encourage TARP recipients
to use compensation structures that link compensation to long-term firm value.
·
Entrusted With Negotiating Reimbursements for
Taxpayers: The Special Master will also oversee the
review of bonuses, retention awards, and other compensation paid before February
17, 2009 by TARP recipients, and, where appropriate, negotiate appropriate
reimbursements to the Federal Government.
·
Issuing Determinations Based on a Clear Set of Principles:
The IFR sets out a clear set of general principles that
the Special Master will use to help determine whether TARP participants receiving
exceptional assistance have designed executive compensation to maximize
shareholder value and protect taxpayer interests, summarized as follows:
o Risk: Compensation
should avoid incentives that reward employees for short-term or temporary
increases in value that may not ultimately result in an increase in the long-term
value of the TARP recipient;
o Taxpayer
Return: Compensation should reflect the need for the
TARP recipient to remain a competitive enterprise and ultimately repay TARP
obligations;
o Appropriate
Allocation: Compensation should be appropriately allocated
among each element of pay (e.g. salary, short- and long-term incentive
pay, and current and deferred compensation or retirement pay);
o Performance-Based
Compensation: Compensation should be performance-based,
and determined through tailored metrics that encompass individual performance
and/or the performance of the TARP recipient or relevant business unit;
o Comparable
Payments: Compensation should be consistent with, and
not excessive in comparison to, pay for those in similar roles at similar
entities; and
o Employee
Contribution: Compensation should reflect the current
or prospective contributions of the employee to the value of the TARP recipient.
3. Implements and Expands Upon
Key Recovery Act Provisions Consistent with February 4th
Proposals: The rule expands upon key Recovery
Act provisions in light of Treasury's February 4th proposals and the clear
need for shareholders and directors to work together to ensure that compensation
practices at TARP recipients are reformed over th e long term.
·
Extends Required Risk Analysis of Compensation to All
Employees: The original EESA included
a requirement that compensation plans for senior executive officers be limited
to avoid incentives for unnecessary risk-taking, and the Recovery Act expanded
that provision to all employee compensation plans, and also to require that
no employee compensation plan encourage the manipulation of
earnings. Today's rule expands upon those important
provisions by requiring that the compensation committee of the financial
institution provide a narrative explanation of its analysis, allowing
shareholders to determine and evaluate directors' reasoning with respect
to the risks presented by compensation plans.
·
Requires Luxury Expenditure Policies for All TARP
Firms: The rule implements the Recovery Act's requirement
that the board of directors of each TARP recipient put in place a company-wide
policy on luxury or excessive expenditures. To help ensure
that the top executives of each company keep close watch over these types
of expenditures, the rule also requires that the CEO and the CFO of e ach
TARP recipient certify that any expenditure requiring the approval of the
board of directors or a senior executive officer or any executive officer
of a substantially similar level of responsibility, was properly approved,
and requires that the policy mandate prompt internal reporting of any violations
of the policy.
·
Institutes "Say on Pay" Requirement at All TARP Recipients:
Consistent with our February 4th proposals, the Recovery
Act requires that TARP recipients provide an annual shareholder vote on a
non-binding resolution to approve executive compensation packages.
Today's rule requires TARP recipients to permit such a vote consistent
with regulations or guidance promulga ted by the SEC.
4. Sets Additional Compensation
and Governance Standards to Improve Accountability and Disclosure for TARP
Recipients: Beyond new guidance on the provisions explicitly
required by Congress, today's rule includes the following additional requirements
to further protect shareholder value and enhance transparency at TARP firms:
·
Prohibits Tax Gross-Ups: The rule
prohibits the payment to senior executive officers and the 20 next most highly
compensated employees of a tax "gross-up," or a payment to cover taxes due
on compensation such as golden parachutes and perquisites. Studies indicate
that the costs of these payments generally outweigh the benefits they provide
to executives, and this additional requirement reflects the need for the
structure of compensation arrangements to maximize shareholder value.
·
Requires Additional Disclosure of
Perks: Expanding upon SEC disclosure
requirements, TARP recipients will be required to disclose any perquisites
provided to any employee subject to the Recovery Act's bonus limitations
with total value exceeding $25,000. TARP recipients will
also be required to provide a nar rative description of, and justification
for, the benefit. Existing SEC rules require disclosure
of perquisites to the five named executive officers of the
company. By expanding the disclosure to include all employees
subject to the bonus limitation, and by requiring a narrative discussion
of the basis for providing the benefit, the rule will help the owners of
the company better understand why directors have provided perquisites to
employees -- and whether these perquisites are likely to maximize shareholder
value.
·
Mandates the Disclosure of Compensation Consultants:
In light of the extensive involvement of compensation
consultants in setting pay for top executives, the rule requires TARP recipients
to disclose whether the company or its compensation committee engaged a
compensation consultant. In order to give shareholders
a more clear sense of the consultant's influence over pay and any possible
conflict of interest, the rule requires TARP recipients to provide a narrative
description of the services provided by any such consultant, including any
non-compensation related services provided by the consultant or any of its
affiliates, as well as a description of the use of any "benchmarking" procedures
in the consultant's analysis.
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REPORTS
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