TARP Limits on Executive Compensation

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA of 2009). This act is more commonly known as the Stimulus package or the Stimulus bill. The main purpose of the act is to stabilize the US economy with a large injection of federal funds. However, the ARRA of 2009, does also address issues with the “Trouble Asset Relief Program” (TARP) enacted in fall 2008 which was part of the Emergency Economic Stabilization Act (EESA). The media more commonly refers to TARP as the Banking Industry Bailout.

The main focus of this writing is to summarize Title VII of the ARRA of 2009 called “Limits on Executive Compensation.” This title specifically focuses on requirements and/or restrictions put on banks that have or will receive TARP assistance from the US Treasury. Section 7001 of ARRA of 2009 amends Section 111 of the Emergency Economic Stabilization Act of 2008. Please note that the amount of TARP assistance taken by an institution will determine which officers and employees are covered by this section (see Table 1). The most important requirements and/or restrictions are listed below:

• “Prohibition on paying or accruing any bonus, retention award or incentive ompensation to senior executive officers”

• “Prohibition on making any golden parachute payment to a senior executive officer or any of the next 5 most highly paid employees”

• Provision for “Clawback Rights” “on any bonus, retention award or incentive compensation paid to a senior executive officer and any of 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”.

• Annual Limit of $500,000 of deductible compensation for some senior executives as applicable to section 162(m)(5) of Internal Revenue Code of 1986

• Requirement for both “the Chief Executive Officer and the Chief Financial Officer to provide written certification of compliance to the rules of this section.”
o Publicly Traded companies must provide certifications to the Security and Exchange Commission with other required filings
o Private companies must provided certifications to the Treasury Secretary

• Requirement to “establish a Board Compensation Committee comprised entirely of independent directors for purpose of reviewing employee’s compensation plans.” “The compensation committee shall meet at least semi-annually.” Non-SEC registrants that have received $25 million or under of TARP assistance can have their full board of directors carry out the duties of a compensation committee.

• Requirement to have a company policy regarding excessive or luxury expenditures as determined by the Treasury Secretary which may include:
o Entertainment or events
o Office and facility renovations
o Aviation or other transportation services
o Other activities or events that are not reasonable expenditures for staff development

• Provision for what is being called “Say on Pay”. Which is a requirement to ‘permit a separate shareholders vote to approve the compensation of executives.” However this vote is non-binding.

• Provision that states “the Treasury Secretary shall review bonuses, retention awards and other compensation paid to senior executive officers and the next 20 most highly compensated employees prior to the enactment of the ARRA of 2009.”

Exceptions to the Prohibitions on Bonuses

There are two notable exceptions on the prohibition of bonuses in section 7001:
• Prohibition on bonuses does not include payment of long-term restricted stock, provided that such long-term restricted stock:
o Does not fully vest during TARP assistance period
o The value is not greater than one third (1/3) of the total amount of officers and/or employees annual compensation
o Is subject to other terms and conditions determined by Treasury Secretary to be in the public’s best interest.

• Prohibition on bonuses does not include payments required to be paid pursuant to a written employment contract executed on or before February 11, 2009

The American Recovery and Reinvestment Act of 2009 has clearly introduced new challenges to the issues of Executive Compensation and Corporate Governance. At this time, these requirements and restrictions only apply to companies who currently have or will have outstanding obligations of TARP assistance. Title VII, section 7001 of the ARRA of 2009 leaves certain issues open to the determination of the Treasury Secretary. Therefore we anticipate there will be updates over the next year.

Total Compensation Solutions is available to review any compensation issues regarding TARP compensation rules or any other compensation issues. Call Tom Bailey at 914-730-7300 or go to www.Total-comp.com

"Bailouts, Layoffs and Stimulus Packages" Employee Compensation in an Economic Downturn

If you’ve watched or read business news in the last six months, you might get the impression that no one has a job anymore. However, this perception is simply not true. Overwhelming numbers of Americans are still employed. Therefore, there is still a great need for companies to implement good compensation strategies to help keep their current workforce focused and engaged.

When the headlines are dominated by bailouts, layoffs and stimulus packages, it’s very easy for employers to take the “you’re lucky you have a job” approach towards employees. And yes, companies can forgo salary increases, cancel bonuses, cut benefits and/or layoff employees and those actions could all be valid for the survival of the business. However, these approaches should be considered as a last resort because they could have long term adverse effects on your most valued employees. Martha Glantz, a senior director at Total Compensation Solutions, has been involved in several significant downsizings for major corporations and she has seen the fallout from these actions. “They might stay through the hard times but you have also given them reasons to be resentful and/or to start looking elsewhere.” says Glantz.

In a time of economic downturns, it is imperative that companies retain their most productive and valuable employees. Because even when the economy is sluggish, organizations still need to continue operations, maintain business relationships, provide good products and services and find new avenues of business. These goals cannot be accomplished unless you have your best people in place.

So what are good compensation strategies during down times? Companies need to answer these questions:

1. Do we have a strategy to attract, retain, and motivate our employees? Are we losing talent or not getting talent that we need?

2. To what degree does our compensation philosophy help us to achieve our objectives?

3. Do we have the tools in place to recognize and reward our top performers?

4. Do we regularly survey the market to assess the competitive level of our compensation programs?

5. Do we communicate to our employees the value (in dollars) their total rewards package (cash compensation, retirement benefits, health benefits etc.)?

These questions are designed to help companies think of compensation as more than a cost of doing business. Compensation as part of a total rewards strategy can facilitate employees who are engaged with the business which in turn leads to better performance and business results.

If your company feels the need to implement more dramatic approaches such as downsizing, wage freezes, lower or no bonuses, a third party can help you to think through the alternatives. For any change, communication is the key for the employees who remain with the company. If they understand the reasons behind the decisions being made, you may keep these employees motivated and engaged at least for the short-term.

Please call Tom Bailey at Total Compensation Solutions at 914-730-7300 to learn more about good compensation strategy or assistance with any of your compensation issues.

*****************************************

Tom Bailey is a compensation consultant at Total Compensation Solutions (TCS). TCS is a full-service compensation consulting firm specializing in Executive compensation, Board-based compensation, Non-profit compensation, Board of Directors Compensation & Governance, Deferred Compensation, Bonus/Incentive Plan Design and Review, Severance Planning and Custom Salary Surveys. TCS has offices in Armonk, NY, Philadelphia & Los Angeles. For more information call 914-730-7300 or visit us at http://www.total-comp.com/