Vol 6 (2009) - Issue 2

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Executive Compensation and the American Recovery and Reinvestment Act of 2009

On 17 February 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the ‘Act’) which, among other things, amends Section 111 of the Emergency Economic Stabilization Act of 2008 (‘EESA’) which relates to executive compensation limitations for financial institutions receiving funding under the Troubled Asset Relief Program (‘TARP’). Under the original terms of EESA, only the top five most highly paid executives of a public company receiving assistance under TARP were subject to compensation limitations and restrictions. The Act now expands these limitations and restrictions to as many as the next twenty most highly-compensated employees, or to such higher number as the US Department of the Treasury (‘Treasury’) may determine is in the ‘public interest’. In addition, the Act goes so far as to revisit compensation determinations made prior to the enactment of the Act to confirm that such prior compensation determinations were consistent with TARP and not contrary to ‘public interest’.

As previously set forth in EESA, the Act maintains the definition of ‘senior executive officers’ as the top five most highly paid executives of a public company (and any non-public company counterparts) whose compensation is required to be disclosed pursuant to the compensation disclosure rules of the Securities Exchange Act of 1934 (the ‘Securities Exchange Act’). The Act does not, however, specifically define ‘highlycompensated employees’ who would be subject to the executive compensation restrictions.

The Act establishes that any restrictions on compensation which are applicable for so long as any TARP assistance remains outstanding will no longer be applicable at the time the US Government holds only warrants to purchase common stock in the recipient institution. Many of the provisions of the Act include this restriction (as outlined below).

Specifically, the Act sets forth the following requirements for institutions receiving TARP assistance:

Risk Avoidance: Compensation of individuals at the TARP recipient institution must be structured to avoid incentives for senior executive officers to take ‘unnecessary’ and ‘excessive risks’ that threaten the value of the recipient institution during the period in which TARP assistance remains outstanding.

Clawback for Materially Inaccurate Information: Any ‘bonus, retention award, or incentive compensation’ paid to any of its senior executive officers and any of its next twenty most highly-compensated employees based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate must be clawed back from the employee by the TARP recipient institution. Notably, the Act, unlike Treasury’s 4 February 2009 guidelines, extends exposure to the clawback beyond the senior executive officers to the next twenty most highly-compensated individuals regardless of fault, if the basis for their compensation is later determined to have been based upon facts that were ‘materially inaccurate’. The 4 February 2009 guidelines had extended such clawback exposure to the twenty most highly-compensated individuals only in cases where they were found to have ‘knowingly engaged’ in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay.

No Golden Parachutes: TARP recipient institutions may not make any golden parachute payments to any senior executive officer or any of the next five most highly-compensated employees during the period in which TARP assistance remains outstanding. The Act amends EESA to provide that a ‘golden parachute’ means any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.