After much news coverage of the salaries and bonuses being received by top executives at financial institutions requiring bailout by the Federal Government, through taxpayer money, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA was signed into law on February 17, 2009 and places strict limits on executive compensation for financial institutions receiving federal assistance under the Troubled Assets Relief Program (“TARP”).
The restrictions, the major ones of which are outlined below, apply to all institutions that have already received or will receive governmental financial assistance under TARP (“TARP Recipients”). The executive compensation restrictions apply to TARP Recipients for as long as the Treasury holds preferred stock in the institution. ARRA allows TARP Recipients to avoid the executive compensation restrictions by repaying any government assistance.
TARP Recipients are prohibited from making severance payments (i.e., a “golden parachute”) to a top five senior executives officers (“SEOs”) or any of the next five most highly-compensated employees.
ARRA does not contain a cap on salaries, however, the original TARP tax deductibility cap of $500,000 remains in place for the SEOs.
ARRA prohibits the payment of bonuses by TARP Recipients depending on the amount of government assistance the institution received.
- For institutions receiving $500 million or more, the prohibition applies to the SEOs and the next 20 most highly compensated employees.
- For institutions receiving between $250 million and $500 million, the prohibition applies to the SEOs and the next ten most highly compensated employees.
- For institutions receiving between $25 million and $250 million, the prohibition applies to the SEOs.
- For institutions receiving under $25 million, the prohibition applies only to the most highly compensated employee.
The prohibition does not apply to grants of restricted stock under certain situations. Also, the Treasury is authorized to increase the scope of the bonus prohibition to cover more individuals.
TARP Recipients must recover any bonus, retention award or incentive compensation paid to the SEOs and the next 20 most highly compensated employees based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate.
TARP Recipients must establish company wide policies regarding excessive or luxury expenditures (as identified by the Treasury), which may include (i) entertainment or events; (ii) office and facility renovations; (iii) aviation or transportation services; and (iv) other activities or events that are not reasonable expenditures for staff development or performance.
Say on Pay
Public companies must permit nonbinding shareholder votes on executive compensation (i.e., “say on pay”). ARRA directs the Securities and Exchange Commission (“SEC”) to promulgate proxy rules for “say on pay” within one year.
Review of Prior Payments
ARRA authorizes the Treasury to review bonuses, retention awards and other pre-ARRA compensation paid to SEOs and the next 20 most highly compensated employees of TARP Recipients to determine whether any payments were excessive or inconsistent with the purposes of ARRA or otherwise contrary to the public interest. If the Treasury determines any payments to be improper, the Treasury will enter into negotiations for appropriate reimbursement to the Federal Government.
TARP Recipients are required to establish independent compensation committees to review compensation plans semi-annually in relation to any risk posed to the company as a result of its compensation plans.