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February 23, 2009
New Limits on Executive Pay for Some Financial Firms

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The recently enacted Emergency Economic Recovery Act of 2009 includes limits on executive compensation for firms receiving funds from the Troubled Asset Relief Program (TARP).

TARP allows the federal government to purchase assets and equity from financial institutions in order to strengthen the sector.

The Emergency Economic Recovery Act of 2009 prohibits TARP recipients from giving golden parachute payments to their senior executive officer or any of the next 5 most highly-compensated employees. The provision applies to TARP recipients during the period in which they have TARP obligations outstanding.

The law defines "golden parachute payment" 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.

The law also prohibits TARP recipients from paying or allowing executives to accrue any bonus, retention award, or incentive compensation during the period in which they have TARP obligations outstanding. There is an exception for long-term restricted stock.

Under the new law, TARP recipients must also allow a nonbinding shareholder vote on executive compensation.

The federal government has a year to come up with regulations implementing the new executive compensation rules covering TARP recipients.

In early February, President Barack Obama and the Treasury Department issued a set of guidelines on executive pay for financial institutions that are receiving government assistance to address the current financial crisis. The guidelines put a cap on executive compensation at firms receiving “exceptional assistance” – that is, those that have bank-specific negotiated agreements with the Treasury Department. Under the guidelines, if banks fall under the exceptional assistance standard, they must limit senior executives to $500,000 in total annual compensation (except for restricted stock).

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