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February 9, 2009

New Compensation Limits On Financial Institutions Receiving Government Assistance

On February 4, 2009, the Department of the Treasury announced that financial institutions receiving government assistance will be subject to guidelines limiting pay for their senior executives (the "Guidelines").

The Guidelines have two sets of restrictions, one for institutions that will be participating in generally available capital access programs and one for institutions that will be receiving "exceptional assistance," such as that previously received by AIG, Bank of America and Citigroup. The Guidelines are not retroactively applied. Therefore, financial institutions that have previously received aid are not subject to the new restrictions.

Exceptional financial recovery assistance: Financial institutions receiving exceptional financial assistance will be subject to the restrictions set forth below:

  • $500,000 cash limit plus restricted stock. Total annual compensation for senior executives (not defined) will be limited to $500,000, except for "restricted stock and long-term incentive arrangements." Permissible restricted stock and other long-term incentive arrangements may not be convertible into cash until either the government assistance has been repaid in full, including contractual dividend payments that ensure taxpayers are compensated for the "time value of their money," or after a specified period according to conditions that consider, among the factors, the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards. 
  • "Say on pay" resolution. The financial institution must submit the senior executive compensation structure and the rationale for how compensation is tied to sound risk management to a non-binding shareholder vote, that is, a "say on pay" resolution. 
  • Bonus clawbacks. The financial institution must have provisions to "claw back" bonuses and incentive compensation from any of the top 25 senior executives if it is later determined that they knowingly provided inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay. 
  • Golden parachutes prohibited or limited. The top 15 senior executives will be prohibited from receiving any golden parachute payments upon termination of their employment.The next 25 senior executives may receive no more than one year's compensation upon termination. 
  • Board policy on luxuries. The board of directors of the financial institution must adopt a policy on expenditures for aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events; excluding, however, reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to the company's normal business operations. The policy must be posted on the company's web site. 
  • Certification by CEO and the Compensation Committee. The chief executive officer of the financial institution will be required to certify annually that the company has strictly complied with compensation restrictions imposed by statute, by the Treasury Department or by contract. Also, the company's compensation committee must disclose why senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.

Generally available capital access programs: Where a financial institution participates in a "generally available capital access program," such as the Treasury's Capital Purchase Program, the Guidelines contain similar components as applicable to a company receiving exceptional financial assistance, although some are less restrictive and/or may be waived under certain conditions. While the Treasury Department plans to issue further guidance on these components and to solicit public comment, the following is a recap of the proposed guidelines: 

  • Waiver of cap if disclosure and "say on pay" shareholder resolution. The $500,000 plus restricted stock rule can be waived if the company provides disclosure of compensation and will, if requested, offer to the shareholders the opportunity to vote on a non-binding "say on pay" resolution. The financial institution must review and disclose the reasons why compensation arrangements do not encourage excessive and unnecessary risk-taking.
  • Golden parachutes. Under the golden parachutes limitation, the top 5 senior executives can receive no more than one year's compensation upon termination of employment. 
  • Luxury expenditures. The financial institution's board of directors must adopt the same policy on various expenditures as required of companies receiving exceptional assistance.

Looking forward. The Treasury Department also announced its desire to take steps to improve compensation arrangements at all public financial institutions to promote sound risk management and long-term value creation for the company and "the economy as a whole."


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