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Nov 2008
25
November 25, 2008

Executive Compensation After the Bailout

The Emergency Economic Stabilization Act of 2008 imposes significant new limits on the executive compensation of financial institutions that participate in the Act’s Troubled Asset Relief Program (TARP). While these limits now apply only to participants in TARP, many see them as the first wave of potential Congressional action on deferred compensation generally. Only time will tell. In the meantime, these are the provisions in place now.

Direct Purchases

A financial institution that sells troubled assets directly to the Secretary of the Treasury (where no bidding process or market prices are available) and where the Secretary receives a "meaningful" equity or debt position in the financial institution as a result of the transaction must:

  • Limit compensation to exclude incentives for executive officers to take "unnecessary and excessive risks" that threaten the value of the institution (it is not clear what that means).

     
  • Place a "clawback" provision in its agreements providing for recovery by the institution of any bonus or incentive compensation paid to a senior executive officer based on financial statements that are later proven to be materially inaccurate.

     
  • Prohibit any golden parachute payments to its senior executive officers.

Senior executive officers are individuals who are one of the top five executives of a public company whose compensation is required to be disclosed pursuant to SEC rules and also includes their counterparts in non-public companies.

It appears that the clawback rule applies without regard to whether there was any misconduct on the part of the executive or whether there was even any connection between the executive and the misleading financial statements.

Auction Sales

A financial institution that sells $300 million or more in assets through the TARP auction program (including any sales through direct purchases) is subject to the following:

  • The Code Section 162(m) limitation on deductible compensation of the CEO, CFO and the top three highly-compensated officers at the company is reduced from $1 million to $500,000 per year. For the first time, this provision of Section 162(m) will also apply to non-public companies, and in all cases will not contain any exception for "performance-based compensation." In addition, compensation that is non-deductible under this provision may not be deferred to future years in order to allow a deduction at that time. Status as an employee affected by Section 162(m) travels with the employee into the future.

     
  • The Section 280G golden parachute rules will apply to any payments made upon severance from employment of the five individuals noted above by reason of an involuntary termination or in connection with a bankruptcy, liquidation or receivership.

     
  • Any new employment contract with a senior executive officer may not provide any golden parachute in the event of involuntary termination, bankruptcy, insolvency, or receivership.

There are plenty of gray areas within the measure, however. It is not clear how these new rules apply to existing compensation arrangements, although it appears the rules apply in full. There is apparently no transition relief for existing agreements and plans. It is also not clear how the new rules apply to parent or holding companies.

The Act does not recognize the potential impact on the financial institution’s decision whether to participate in TARP or the impact on its top managers and the prospect that top executives may choose to leave the organization rather than accept the limitations.

Clearly a new day is dawning for executive compensation. The attorneys in the Employee Benefits Practice Group stand ready to help guide you through these complicated rules.
 

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