Congress Passes Stimulus Act with Stringent Executive Compensation Rules and Strong Corporate Governance Mandates
Congress has passed and cleared for the President the American Recovery and Reinvestment Act of 2009, imposing stringent executive compensation limits on companies participating in the troubled assets relief program (TARP) and setting up a conflict between legislative mandates and less restrictive Treasury regulations. The provisions also require each TARP recipient to include in its annual proxy statement a nonbinding shareholder advisory vote on the company’s executive cash compensation program, thereby providing the first ever federal mandate on say on pay. The Act further prohibits golden parachutes to senior executives and severely restricts bonuses under a complicated regime based on the amount a TARP company receives.
The Act also imposes strong corporate governance mandates on TARP companies, including a requirement to have an independent compensation committee. In addition, it rescinds a controversial IRS ruling on acquisitions by financial institutions.
The provisions fall under a title of the bill added by Senate Banking Committee Chair Christopher Dodd. The Dodd Amendment applies strong executive compensation restrictions to all recipients of TARP funds, regardless of whether they receive a capital injection or sell troubled assets at auction.
The Act also prohibits any compensation plan that creates incentives for employees to manipulate reported earnings or take unnecessary and excessive risks that threaten the company’s value. The board must also adopt a company-wide policy on luxury expenditures.
The TARP company CEO and CFO must provide a written certification of compliance by the company with the executive compensation and corporate governance requirements. In the case of a TARP company whose securities are publicly traded, the certification must be provided to the SEC, together with annual filings required under the securities laws. For nonpublic companies, the certification must be filed with the Treasury.
The Act also requires TARP recipients to establish a compensation committee of the board of directors composed entirely of independent directors for the purpose of reviewing compensation plans. The Act directs the compensation committee of each TARP recipient to meet at least semiannually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans.
Another required corporate governance standard for TARP recipients is that they are prohibited from paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any such prohibition must not apply to the payment of long-term restricted stock by such TARP recipient, provided that such long term restricted stock does not fully vest during the period in which any obligation arising from financial assistance provided to the TARP recipient remains outstanding and has a value that is not greater than one-third of the total amount of annual compensation of the employee receiving the stock; and also is subject to any other conditions Treasury may impose in the public interest.
The prohibition on the paying of bonuses by TARP companies will apply in the following way: For financial institutions that received TARP financial assistance of $25,000,000, or less the prohibition will apply only to the most highly compensated employee of the financial institution. For financial institutions that received TARP financial assistance of between $25,000,000 and $250,000,000 the prohibition on bonuses must apply to the five most highly-compensated employees, or such higher number as determined by Treasury as being in the public interest. For financial institutions that received TARP assistance of between $250,000,000 and $500,000,000 the prohibition on bonuses must apply to the senior executive officers and at least the next ten most highly compensated employees or a higher number determined by Treasury as in the public interest. For any financial institution receiving TARP assistance of $500,000,000 or more the bonus prohibition will apply to the senior executive officers and at least the 20 next most highly compensated employees or such higher number as Treasury may determine as in the public interest.