The U.S. Treasury Department Announces New Restrictions on Executive Compensation for Financial Institutions Receiving Government Assistance
February 5, 2009
David O'Leary - Chicago
On February 4, 2009, the Treasury Department issued strict new regulations on executive pay for banks and other financial institutions receiving assistance under the federal government’s “bailout” programs. The new regulations impose a $500,000 salary cap on banks receiving “exceptional assistance,” restrict severance payments to terminated executives and impose disclosure requirements on so called “luxury spending.”
The Obama administration has indicated it recognizes that distressed financial institutions need to attract and retain top talent if they are to regain profitability and repay the taxpayers’ investments. Nonetheless, the administration has significantly restricted the amount of compensation that can be paid to such employees and imposed strict monitoring and accountability requirements on these institutions. It is clear that this is only the beginning of a long-term effort by the administration to examine and reform executive compensation policies.
The new regulations distinguish between banks and financial institutions receiving governmental assistance under generally available programs, and banks and financial institutions receiving “exceptional assistance.” For those institutions receiving exceptional assistance, such as AIG, Bank of America and Citigroup, the restrictions are draconian. While the restrictions are less severe for those institutions participating in generally available assistance programs, they will still have a significant effect on the compensation strategies of these institutions. The new regulations generally do not apply retroactively, but will apply to banks and other financial institutions receiving future assistance, including those who have already received assistance.
The new regulations require:
- Annual Certification. The chief executive officers of all banks receiving any form of government assistance must provide certification that the banks have strictly complied with statutory, Treasury and contractual executive compensation restrictions. Compliance with these restrictions must be re-certified annually. In addition, compensation committees of these banks must provide an explanation of how their senior executive compensation arrangements do not encourage excess or unnecessary risk taking.
- $500,000 Compensation Cap. The compensation of senior executives of banks receiving exceptional assistance is limited to no more than $500,000. Additional amounts can be paid by using restricted stock or other similar long-term incentive arrangements if the executive is prohibited from receiving benefits (a) prior to the time the government has been repaid, with interests, or (b) after a specified period, as negotiated between the bank and Treasury. Banks receiving assistance through generally available programs are permitted to waive this compensation cap if they provide full public disclosure and the waiver is approved by vote of the bank’s shareholders.
- “Say or Pay” Shareholder Resolution. For banks receiving exceptional assistance, the senior executive compensation structure and the rationale for how compensation is tied to sound risk management must be fully disclosed and submitted to a non-binding shareholder resolution.
- Bonus Clawbacks. All banks receiving government assistance must have a program in place to claw back bonuses and incentive compensation from any of the top 25 senior executives if they are found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay.
- Ban on Golden Parachutes. For banks receiving exceptional assistance, the top 10 executives are prohibited from receiving any golden parachute payments upon a severance from employment. The next 25 executives will be prohibited from receiving any golden parachute payment greater than one year’s compensation, upon a severance from employment. For banks receiving assistance through generally available programs, only the top five executives will be affected and they will be prohibited from receiving any golden parachute payment greater than one year’s compensation.
- Board’s Approval of Luxury Expenditures. The boards of directors of banks receiving any governmental assistance must adopt a company-wide policy on any expenditures related to aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events. This policy is not intended to eliminate reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to a bank’s normal business operations. The bank’s chief executive officers must certify expenditures that could be viewed as excessive or luxury items. The text of the bank’s expenditure policy should be posted on the bank’s website.
The Importance of Compliance With the New Rules
The new regulations are only the beginning of the administration’s attempt to regulate executive compensation. If you are a bank or other financial institution that is currently receiving or is considering any type of government assistance, it is imperative to review your compensation policies and determine the steps that must be taken to comply with the new regulations. If you are not receiving, and do not expect to receive, any government assistance, it is still important to understand the new rules as some of them may apply or affect your company or institution.
Holland & Knight attorneys are very experienced in this area and can assist you in all aspects of understanding and complying with the new regulations as well as determining if your company should consider government assistance.
Holland & Knight’s Financial Recovery Team
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