Monday, February 23, 2009

Stimulus Impacts Some Executive Compensation

More on the Stimulus. In addition to providing tax credits and spending for jobs, The American Recovery and Reinvestment Act imposes new restrictions on executive compensation for the financial institutions receiving federal funds.

Here's Kim Ryan's 9News interview by Gary Shapiro today discussing the stimulus.

The stimulus law includes three key components relating to executive compensation: 1) restrictions on executive bonuses and golden parachutes; 2) establishment of compensation boards; and 3) limits on luxury expenses.

Compensation restrictions. This provision applies to financial institutions receiving federal funds, called TARP recipients (Troubled Assets Relief Program). The limits depend on the amount of funds received under TARP and generally provide that top earners cannot receive stock bonuses that are more than 1/3 of their total amount of annual compensation while their obligations to TARP are outstanding. The stock can only be redeemed when the government funds have been repaid. This limitation does not apply bonus payments based on written employment contracts signed on or before Feb. 11, 2009.

Nevertheless, the law provides that the SEC can review compensation for entities that received assistance before the stimulus law was passed. The SEC can determine whether any such payments to top executives were inconsistent with the purpose of the law or against the public interest. If the payments were inappropriate, the SEC may seek reimbursement of the compensation paid out.

Senior executive officers may not take "unnecessary and excessive risks" that threaten the value of the institution while they are receiving funds under TARP. The law also contains a provision allowing for the recovery of bonuses or incentive compensation for the most highly-compensated employees if the statements of earnings are later found to be materially inaccurate.

TARP recipients may not provide golden parachute payments to a senior executive officer or any of the next 5 most highly compensated employees while their TARP obligations are outstanding. Golden parachute payments are defined as any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.

Compensation boards. The law also requires TARP recipients to establish Board Compensation Committees, comprised entirely of independent directors, for the purpose of reviewing employee compensation plans. They must meet at least twice a year to discuss and evaluate employee compensation plans in light of an assessment of any risk these plans pose to the TARP recipient.

Limits on luxury expenses. The board of directors of any TARP recipient shall implement a company-wide policy regarding excessive or luxury expenditures, which may include limits on spending for:

1) entertainment or events;

2) office and facility renovations;

3) aviation or other transportation services; or

4) other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives or other similar measures conducted in the normal course of the business operations.

The CEOs and CFOs of these companies are required to provide a written certification of compliance with the law. The federal Securities and Exchange Commission must issue final rules and regulations within one year.

To see the text of the law, go here.
For more information on employment law, see

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