The America Reinvestment and Recovery Act of 2009 (“ARRA”) (also known as the
“stimulus bill”), signed into law by President Obama today, February 17, 2009,
contains expansive new restrictions on executive compensation for financial
institutions and other companies participating in the federal government’s
Troubled Asset Relief Program (TARP).
The ARRA replaces the executive compensation restrictions previously imposed
by the Emergency Economic Stabilization Act of 2008 (EESA). In doing so it
continues all the same restrictions and adds substantially to the restrictions
in several areas. The ARRA also goes substantially beyond the Treasury
executive compensation guidelines for TARP participants that were announced
on February 4.
The ARRA restrictions are retroactive, meaning they apply to all TARP
participants, whether such companies received money under TARP prior to or after
the enactment date, February 17, 2009. This is in contrast with the Treasury’s
guidelines, which generally apply only to companies that receive money under
TARP after the guidelines were announced.
Some key features of the new executive compensation restrictions in the ARRA
are described below.
- ARRA prohibits bonus and similar payments to top employees. The ARRA
prohibits the payment of any “bonus, retention award, or incentive compensation”
to certain highly compensated employees for as long as any TARP-related
obligations are outstanding. The number of affected employees depends on the
amount of TARP assistance received, and ranges from the single highest paid
employee for companies receiving less than $25 million in assistance to the top
five senior executives plus “at least” the next twenty most highly compensated
employees for companies receiving more than $500 million in assistance. The
prohibition does not apply to bonuses payable pursuant to “employment
agreements” in effect prior to February 11, 2009. The Treasury’s guidelines do
not contain a similar limit on bonuses. Instead, the Treasury’s guidelines
impose a $500,000 annual compensation cap for a company’s senior executive
officers, but allow the cap to be waived for all companies other than those
receiving “exceptional” assistance. Waiver would be conditioned on the company
fully disclosing compensation and allowing shareholders a non-binding
- Limited amount of restricted stock excluded from bonus prohibition.
“Long-term” restricted stock is excluded from the ARRA’s bonus prohibition, but
only to the extent the value of the stock does not exceed 1/3 of the total
amount of annual compensation of the employee receiving the stock, the stock does not
“fully vest” until after all TARP-related obligations have been satisfied, and
any other conditions which the Treasury may specify have been met. The
Treasury’s guidelines also exempt restricted stock from the $500,000 annual
compensation cap described above, but do not place any limit on the amount of
restricted stock that may be granted.
- Shareholder “say-on-pay” vote required. The ARRA requires every company
receiving TARP assistance to permit a non-binding shareholder vote to approve
the compensation of executives as disclosed in the company’s proxy statement.
The Treasury’s guidelines contain a similar requirement for companies receiving
“exceptional” assistance but other companies are not required to permit the vote
unless they want to waive the $500,000 annual compensation cap described above.
- Stricter restrictions on “golden parachute” payments. EESA generally
limited “golden parachute” payments to senior executives to three-times the
executives’ base compensation. The ARRA prohibits any payment to a senior
executive officer or any of the next five most highly compensated employees upon
termination of employment for any reason for as long as any TARP-related
obligations remain outstanding. For all companies other than companies receiving
“exceptional” assistance, the Treasury’s guidelines limit golden parachute
payments to one-times base compensation and only apply the limit to the senior
- Broader bonus clawback requirements. EESA required TARP-participating
companies to recover any bonus or other incentive payment paid to a senior
executive officer on the basis of materially inaccurate financial or other
performance criteria. The ARRA extends this recovery requirement to the next
twenty most highly compensated employees in addition to the senior executive
officers. This extension is consistent with the Treasury’s guidelines on this
- Prohibition on compensation plans that “encourage” earnings manipulation.
The ARRA prohibits TARP participants from implementing any compensation plan
that would encourage manipulation of the reported earnings of the company in
order to enhance the compensation of any of its employees. The Treasury
guidelines do not contain a similar requirement.
- Board compensation committee required. The ARRA requires TARP participants
to establish a board compensation committee and requires the committee to meet
at least semiannually to discuss and evaluate employee compensation plans in
light of an assessment of any risk to the company posed by such plans. The
Treasury guidelines do not contain a similar requirement.
- New reporting and certification requirements. The ARRA requires the CEO and
CFO of any publicly-traded TARP-participating company to provide a written
certification of compliance with the executive compensation restrictions in the
ARRA in the company’s annual filings with the SEC (presumably its annual report
on Form 10-K or proxy statement). A similar reporting and certification
requirement applies to non-publicly traded companies. The Treasury’s guidelines
require reporting and certification as well but do not detail how the reporting
and certification are to be accomplished.
- Policy on luxury expenditures. The ARRA requires each TARP-participating
company to implement a company-wide policy regarding excessive or luxury
expenditures, including excessive expenditures on entertainment or events,
office and facility renovations, aviation or other transportation services. This
is consistent with the Treasury’s guidelines which contain a similar
- Treasury review of prior payments. The ARRA directs the Treasury to review
bonuses, retention awards, and other compensation paid to the senior executive
officers and the next 20 most highly-compensated employees of each company
receiving TARP assistance before the ARRA was enacted, and to “seek to
negotiate” with the TARP recipient and affected employees for reimbursement if
it finds any such payments were inconsistent with TARP or otherwise in conflict
with the public interest.
In addition to the above requirements, the ARRA adopts and continues two
requirements from EESA essentially unchanged:
- $500,000 annual deduction limit. Like EESA, the ARRA prohibits TARP
participants from deducting annual compensation paid to senior executive
officers in excess of $500,000. The Treasury’s guidelines, in contrast,
contain the $500,000 annual compensation cap for senior executives described
above (which may be waived by all companies other than those receiving
“exceptional” assistance) but do not specifically address the deduction limit.
- No excessive risks. Like EESA, the ARRA requires the Treasury Department to
implement limits on compensation that exclude incentives for senior executive
officers of a TARP-participating company to take unnecessary and excessive risks
that threaten the value of the company for as long as any TARP-related
obligation remains outstanding. The Treasury Department implemented this
directive under EESA by requiring periodic compensation committee review and
certification of the risk characteristics of a company’s incentive compensation
arrangements, and presumably these same review and certification requirements
would apply going forward under the ARRA. The ARRA requires that the
compensation committee perform such a review at least semi-annually.
We have created a
chart which summarizes the material differences between the
executive compensation restrictions under EESA, the Treasury’s February 4
guidelines and the ARRA.
The ARRA requires both the Treasury Department and the Securities and
Exchange Commission to issue rules implementing these new executive compensation
restrictions and there will be substantial pressure for this guidance to be
released quickly, given the many open issues and unresolved questions presented
by the bill itself. McGuireWoods will continue to monitor and keep you informed
about new developments in this fast-changing area.
For more information, please contact a member of our
Compensation practice or one of the authors.