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 Department’s separate 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 “say-on-pay” vote.
- 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 executive officers.
- 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 subject.
- 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 requirement.
- 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 Executive Compensation practice or one of the authors.