ALERT: Executive Compensation Analysis of Conference Bill

To Our Clients and Friends:

This is the second email being sent to you today. The first forwarded copies of the actual bill (for those who are interested). The bill is over 1400 pages long and our email included four pdf files. If you have not received it, you should check with your IT Departments, as some systems have document size limitations. Also as we indicated in our prior email, we will have a summary of the legislation by the start of next week. Also, the firm intends to conduct a webinar on the bill during the early part of next week, and we will provide further information on that by the end of the day.

This email is intended to provide a preliminary update on executive compensation measures contained in the stimulus bill, based on our initial review of the language set forth in Title VII of the stimulus bill, a copy of which we forwarded in a prior email. Our review is divided into two parts, the first of which summarizes the new executive compensation language which has been added to the bill, and which includes four new provisions included in the conference bill (some technical, but most notably a lengthy modification of the Dodd prohibition relating to bonuses, retention awards, and other incentive compensation) as discussed below; and second, a summary of provisions included in the conference text which were previously included in the prior Senator Dodd amendment language of the Senate stimulus.

While not a model of clarity, all of the provisions in the bill apply to "TARP Recipients" which is defined as those institutions which have received or will receive TARP funds. Accordingly, it appears to us that the executive compensation restrictions which are discussed in this email will be retroactively applied to institutions that have already participated in the TARP CCP Program prior to the date of the bill. We are still reviewing the bill and attempting to confirm this position.

I. Summary of New Executive Compensation Language Added to Conference Text

(1) Prohibition on Bonuses, Retention Awards, or Other Incentive Compensation

The conference text includes a prohibition on TARP recipients from paying bonuses, retention awards or other incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. The bill includes an exception for the payment of long-term restricted stock by such TARP recipient, provided that such long term restricted stock: (1) does not fully vest during the period in which any obligation arising from financial assistance provided to that TARP recipient remains outstanding; (2) has a value in an amount that is not greater than 1⁄3 of the total amount of annual compensation of the employee receiving the stock; and (3) is subject to such other terms and conditions as the Treasury Secretary may determine is in the public interest.

Further, the bill includes a sliding scale for the number of employees that the foregoing prohibition applies to, based on the level of TARP assistance. For example, for financial institutions: (1) receiving less than $25,000,000 of TARP funds, the prohibition applies to the most highly compensated employee of the financial institution; (2) for any financial institution receiving $25,000,000 to $250,000,000 in TARP assistance, the prohibition applies to at least the 5 most highly-compensated employees of the financial institution, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient; and (3) for financial institutions receiving TARP assistance of $250,000,000 to $500,000,000, the prohibition applies to the senior executive officers and at least the 10 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient; and (4) for financial institutions receiving $500,000,000 or more, the prohibition applies to the senior executive officers and at least the 20 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

The following measures are NOT included in the bill: the prior Senate’s pay cap for TARP recipient employees at the President’s annual salary ($400,000) and the requirement for paying back excess bonuses over $100,000 through redemptions of stock and warrants.

 

(2) Technical Clarification on Rule of Construction on Which TARP Recipients Are Included in the Compensation Restrictions.

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The conference language includes a technical change clarifying that the period in which any obligation arising from financial assistance provided under the TARP remains outstanding does not include any period during which the Federal Government only holds warrants to purchase common stock of the TARP recipient.

(3) Technical Clarification on Compliance by Non-SEC Registrants with Board Compensation Committee Requirements

The conference language includes a measure requiring each TARP recipient to establish a Board Compensation Committee comprised of independent directors to review employee plans, provided that for non-SEC registrants receiving TARP assistance of $25,000,000 or less, the duties of the Board Compensation Committee shall be carried out by the entity’s board of directors.

(4) Clarification Regarding Ability of TARP Recipients to Withdraw From Program

The conference language includes a clarification regarding the ability of TARP recipients to withdraw from the program. Specifically, the bill states that the Treasury Secretary shall permit, subject to consultation with the appropriate Federal banking agency, a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period. The bill clarifies that when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price.

II. Summary of Language Retained in Conference Text from Previous Senate Version

 

(1) Limitation on Luxury Expenditures. The conference language includes a limitation on luxury expenditures such that the board of directors of any TARP recipient must implement a company-wide policy regarding excessive or luxury expenditures. These expenditures will be identified by the Secretary, and may include excessive expenditures on (1) entertainment or events; (2) office and facility renovations; (3) aviation or transportation services; or (4) other activities or events that are "not reasonable" expenditures for conferences, staff development, reasonable performance incentives, or other similar measures conducted in the normal course of business operations of a TARP recipient.

. The conference language includes a limitation on luxury expenditures such that the board of directors of any TARP recipient must implement a company-wide policy regarding excessive or luxury expenditures. These expenditures will be identified by the Secretary, and may include excessive expenditures on (1) entertainment or events; (2) office and facility renovations; (3) aviation or transportation services; or (4) other activities or events that are "not reasonable" expenditures for conferences, staff development, reasonable performance incentives, or other similar measures conducted in the normal course of business operations of a TARP recipient.

(2) Advisory Shareholder Approval of Executive Compensation. The conference text requires TARP recipients to include in annual proxy statements a "say on pay" proposal – e.g. an advisory (non-binding) shareholder vote on the company’s executive cash compensation program. The SEC has one year from enactment of the amendment to issue final rules and regulations to implement this requirement.

The conference text requires TARP recipients to include in annual proxy statements a "say on pay" proposal e.g. an advisory (non-binding) shareholder vote on the company’s executive cash compensation program. The SEC has one year from enactment of the amendment to issue final rules and regulations to implement this requirement.

(3) Review of Prior Payments to Executives, Negotiations for Reimbursement. The conference text requires the Treasury Secretary to review bonuses, retention awards, and other compensation paid to employees of TARP recipients before the date of enactment of the bill to determine whether any payments were "excessive, inconsistent with the purposes of the Act or the TARP or otherwise contrary to public interest." If so, the Secretary shall seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursement to the Government.

The conference text requires the Treasury Secretary to review bonuses, retention awards, and other compensation paid to employees of TARP recipients before the date of enactment of the bill to determine whether any payments were "excessive, inconsistent with the purposes of the Act or the TARP or otherwise contrary to public interest." If so, the Secretary shall seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursement to the Government.

(4) Prohibition on Golden Parachutes to Senior Executives. The conference text directs the Treasury Secretary to establish standards to prohibit TARP recipients from making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient while the obligation arising from TARP is still outstanding. The bill defines "senior executive officer" as an individual who is 1 of the top 5 most highly paid executives of a public company, or their non-public company counterparts. The bill defines "golden parachute payment" as ANY payment to a senior executive officer for departure from a company for any reason, except for services performed or benefits accrued.

The conference text directs the Treasury Secretary to establish standards to prohibit TARP recipients from making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient while the obligation arising from TARP is still outstanding. The bill defines "senior executive officer" as an individual who is 1 of the top 5 most highly paid executives of a public company, or their non-public company counterparts. The bill defines "golden parachute payment" as ANY payment to a senior executive officer for departure from a company for any reason, except for services performed or benefits accrued.

(5) Prohibition on Plans that Encourage Manipulation of Earnings. The conference text directs the Treasury Secretary establish standards that prohibit TARP recipients from engaging in any compensation plan that would encourage manipulation of the reported earnings of the TARP recipient to enhance compensation of any of its employees.

. The conference text directs the Treasury Secretary establish standards that prohibit TARP recipients from engaging in any compensation plan that would encourage manipulation of the reported earnings of the TARP recipient to enhance compensation of any of its employees.

(6) Limits on Plans Incentivizing Employees to Take Unnecessary Risk. The conference text directs the Treasury Secretary to establish standards to place limits on compensation plans of TARP recipients that has incentives for employees to take unnecessary and excessive risks that threaten the value of the company.

(7) Claw-Back. The conference text requires the Treasury Secretary to establish standards that would allow the government to claw back any bonus or incentive compensation paid to an executive based on reported earnings, revenues, gains, or other criteria later found to be materially inaccurate.

We are continuing to evaluate and will provide a more comprehensive analysis when we distribute our Summary of the entire bill. In the meantime, do not hesitate to contact us should you have questions or comments.

Regards.

Norman B. Antin

Jeffrey D. Haas

Joseph G.Passaic, Jr.

Kevin M. Houlihan

Carol Van Cleef

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