TARP Period

Recent Developments and
Trends in Executive Pay for
Financial Services
Marjorie M. Glover
December 17, 2009
Special Note
 This
Powerpoint presentation was presented at
the ThompsonReuters conference on Recent
Developments and Tends in Executive
Compensation for Financial Services Companies
on December 17, 2009
 Provisions
related to the Special Master for TARP
Executive Compensation and related Advisory
Opinions are set forth in a separate Powerpoint
presentation prepared by co-panelist James
Sillery of Buck Consultants
TARP Timeline - 2008
 In
October 2008, the Treasury Department
established the Troubled Asset Relief Program
(TARP) under the Emergency Economic
Stabilization Act of 2008 (EESA)
 EESA was
enacted to restore liquidity and stability to
the financial institutions
 Section 111 of EESA set new “appropriate” standards
for executive pay and corporate governance including:
 incentive
pay limits;
 clawbacks; and
 golden parachute prohibitions
TARP Timeline - 2008
 2008
EESA Guidance
October 2008 Interim Final Rule set original standards for
Capital Purchase Program (CPP) recipients
 Treasury Notice 2008-PSSFI set standards for “systematically
significant failing institutions” including more rigid golden
parachute restrictions
 Treasury Notice 2008-TAAP prohibited any financial institution
selling more than $300M in troubled assets through an auction
program (Auction Sale TARP Recipients) from entering into
new Senior Executive Officer (SEO) agreements with a golden
parachute during length of program
 IRS Notice 2008-94 required Auction Sale TARP Recipients to
forego any deduction in excess of the $500,000 limit on
executive pay under the new IRC Section 162(m)(5) and under
limit on golden parachute deductions under the new IRC
TARP Timeline - 2009
 On
February 4, 2009, Treasury issued new
guidance on executive pay and corporate
governance standards under EESA
 Reporting,
recordkeeping and disclosure
 Additional restrictions on recipients of “exceptional
assistance” including:
 $500,000
pay cap (other than restricted stock and long-term
incentive arrangements)
 Restricted stock vesting requirements
 Expanded clawbacks
 Expanded golden parachute prohibitions
 Establishment of luxury expenditures policies
 Additional restrictions applied only to future grants of TARP
TARP Timeline
 On
February 17, 2009, the American Recovery
and Reinvestment Act of 2009 (ARRA) was
 ARRA significantly
amended EESA provisions on
executive pay and corporate governance
 Unlike the earlier February 2009 Treasury guidance,
ARRA applies to financial institutions that already
received TARP funds
TARP Timeline - 2009
 On
June 10, 2009
 Treasury
announced the publication of an Interim
Final Rule (IFR) under EESA as amended by ARRA
generally supersedes and consolidates all prior
 IFR became effective June 15, 2009
 Treasury
issued a statement regarding legislative
proposals for executive pay for public companies
 Treasury established the Office of Special Master for
TARP Executive Compensation
 The SEC announced it would propose expanded
proxy disclosure requirements that will now take effect
for the 2010 proxy season
TARP Timeline - 2009
 In
June 2009
 Treasury also issued Q&As on the IFR (that
have been subsequently updated)
 In
July 2009
 The SEC issued proposed amendments to
proxy rules to address say on pay votes for
TARP recipients
TARP Timeline
 On
October 22, 2009
 Federal
Reserve and Treasury issued statements on
executive pay and corporate governance
 Special Master issued first round of Advisory Opinions
 On
December 7, 2009
 Treasury
 On
issued technical corrections to the IFR
December 11, 2009
 Treasury
issued limited relief from IRC Section 409A
for certain TARP recipient and their executives
 Special Master issued second round of Advisory
TARP Executive Pay and
Corporate Governance Standards
Governing Law - Section 111 of EESA as amended by ARRA and the IFR
TARP Period – Any period in which TARP recipient owes money to the Federal
government under TARP
Three Categories of Standards
Exceptional Assistance – large financial institution receiving funds over and
above the Capital Purchase Program amount
CPP Recipients – Recipients that hold obligations under the Capital
Purchase Program that provides direct capital infusion in financial
institutions in exchange for senior preferred shares
Other Recipients – Recipients in other TARP programs (small business) that
have no repayment or repurchase obligation
SEO – PEO, PFO and three most senior executives as determined under prior
fiscal year’s SEC filings
Most Highly Paid Employees – determined based on prior fiscal year
compensation and SEC filings
TARP Executive Pay and
Corporate Governance Standards
 Executive
Pay Limits
Retention and
Incentive Pay Limits
Gross-Up Prohibitions
 Corporate
Compensation Committee
on Pay” Vote
and PFO
TARP Executive Pay Standards
 General
Pay Limits
 IRC Section 162(m)(5) Deduction Limit –
Validates agreements of TARP recipients to
forego deduction of pay in excess of $500,000
deduction limit
 Excessive Risk Pay Limits – Prohibits
incentives for SEOs to take unnecessary and
excessive risks threatening TARP recipient’s
 Manipulative Pay Plan Limits – Prohibits
compensation plans that would encourage
manipulation of reported earnings to enhance
compensation of employees
TARP Executive Pay Standards
 Bonus,
Retention and Incentive Pay Limits
 Prohibits TARP recipients from paying or
accruing any bonus, retention or incentive
award to certain highly-paid employees or
 Limits depend on amount of TARP assistance
 Exceptions  Long-term
restricted stock and restricted stock units
 Bonuses paid under certain grandfathered
employment contracts
TARP Executive Pay Standards
Amounts Not Treated As
Treated as Bonuses
Contributions and
qualified plans
Employer contributions and
non-qualified plans
Benefits under broad-based
fringe benefits
Bona fide routine expense
Compensation for certain
sale or acquisition)
Loan forgiveness
Certain commissions (prerate must be established,
applied consistently)
Commissions (other than
TARP Executive Pay Standards
Limit on Bonuses,
Retention and Incentive Pay
Amount of TARP
Covered Executives
Less than $25 million
Most highly-paid employee
$25 million to less than $250 Five most highly-paid
$250 million to less than
SEOs and next 10 most highly-
$500 million or more
SEOs and next 20 most highly-
TARP Executive Pay Standards
 Exceptions:
Long-Term Restricted Stock and
 Prohibition
does not apply to long-term restricted
stock and RSUs as long as:
 the covered executive does not fully vest in the
restricted stock or RSU during the TARP period;
 the value of the restricted stock or RSU does not
exceed one-third of the covered executive’s annual
compensation for the current fiscal year; and
 the TARP recipient complies with such other
restrictions as the Treasury may impose
TARP Executive Pay Standards
 Exceptions:
Grandfathered Employment
 Prohibition
does not apply to bonuses under written
employment contract in effect as of February 11,
2009 and determined by the Treasury to be valid
 Exception does not apply if contract is subsequently
amended to increase the amount payable,
accelerate vesting or otherwise materially enhance
the benefits available under the contract (other than
amendments to reduce bonus amounts, add
vesting criteria or add holding periods)
TARP Executive Pay Standards
 Clawbacks
recipients must recover or “clawback” bonus,
retention and incentive compensation for the SEOs
and the next 20 most highly-paid employees
 if compensation was based on materially inaccurate
financial statements (for example, earnings,
revenue, gains or other criteria) or other materially
inaccurate performance metric criteria
 Facts
and circumstances test
 Recovery
is not necessary if it is deemed
unreasonable (generally if cost of recovery exceeds
benefit of recovery)
TARP Executive Pay Standards
 Golden
Parachute Prohibitions
 Prohibits
payment of golden parachute
payments to the SEOs and any of the next 5
most highly-paid employees
 For
departure for any reason, except for
payment for services performed or benefits
 Single
trigger payments upon change of control
also prohibited
TARP Executive Pay Standards
 Tax
Gross-Ups Prohibited
 Prohibits
any tax gross-ups to any of the
SEOs and next 20 most highly-paid employees
during the TARP period
 Includes
right to tax gross-up at a future date,
for example a date after the TARP period ends
TARP Executive Pay Standards
 Luxury
Board must establish a policy on luxury or excessive
expenditures, including:
 entertainment or events;
 office and facility renovations;
 company-owned aircraft; and
 other transportation and similar activities or events
Within 90 days after closing date of TARP agreement or within
90 days after June 15, 2009, if later, board must:
 adopt excessive or luxury expenditures policy;
 provide policy to Treasury and primary regulatory agency;
 post policy on company website
Corporate Governance Standards
 Compensation
Committee Governance
TARP recipient must establish independent compensation
committee within 90 days after closing date of TARP
agreement or 90 days after June 15, 2009, if later
Independent compensation committee must meet at least
semi-annually to discuss, evaluate and review with TARP
recipient’s senior risk officer SEO compensation plans to make
sure they do not take unnecessary and excessive risks that
threaten value of TARP recipient or earnings manipulation
Report at least once per fiscal year on how plans comply with
new standards
Certify completion of reviews
Corporate Governance Standards
recipient must disclose annually during TARP
period any perquisite with a total value exceeding
$25,000 during the fiscal year for each SEO and the
most highly paid employees (as described in chart on
page 14)
 Must include narrative of amount and nature, recipient
and justification for offering perquisite
 Disclosure due within 120 days after completion of
fiscal year during the TARP period
 Must disclose to Treasury and primary regulatory
Corporate Governance Standards
Consultant Disclosure
recipient must disclose annually whether TARP
recipient or its board or compensation committee has
engaged outside compensation consultant
 Must include narrative of all types of services provided
(including non-compensation related services) during
last three years, including benchmarking or
 Disclosure due within 120 days after completion of
any fiscal year during the TARP period
 Must disclose to Treasury and primary regulatory
Corporate Governance Standards
 Say
on Pay
recipients must submit to shareholders for a
non-binding advisory “say on pay” vote on executive
issued guidance on annual say on pay
requirements for TARP recipients in July 2009
Corporate Governance Standards
and PFO Certifications
 The
principal executive officer and principal financial
officer must certify compliance with the requirements
noted above
 For public companies, certification must be made to the
 For private companies, certification must be made to
 Treasury provides model certifications in IFR
 Separate models apply to first year certifications and
second year certifications
Corporate Governance Standards
Fund Repayment
recipients may repay TARP funds without
replacing the repaid amount with other funds and
without a waiting period
 If the amounts are repaid, the restrictions on
executive compensation described above generally
cease to apply
October 2009
Federal Reserve Guidance
 October
22, 2009, Federal Reserve announced two separate
initiatives to provide supervisory review of bonus plans for all
banking organizations supervised by Federal Reserve:
28 large complex banking organizations (LCBOs)
Regional, community and other banking organizations
After conclusion of 2010, Federal Reserve will prepare report on trends and
developments for bank executive pay plans
 October
27, 2009, Federal Reserve Proposed Guidance on Sound
Incentive Compensation Policies was published in Federal
Register - Three principles:
Provide employees incentives that do not encourage excessive risk taking
Be compatible with effective controls and risk management
Be supported by strong corporate governance including active and effective
board oversight
Notice 2009-92
 Issued
December 11, 2009
 Provides relief under IRC Section 409A (409A) to TARP
recipients and their executives who comply with a
Special Master Advisory Opinion that requires either:
a change in the time or form of pay; or
 conditions payment upon a TARP-related condition such as the
prior repayment of some or all financial assistance will not
violate 409A
 Applies
only to Advisory Opinions issued after
September 30, 2009
 Treasury and IRS intend to amend 409A regulations to
incorporate guidance
Notice 2009-92
 Requirements
for 409A Relief
Advisory Opinion must be addressed to TARP recipient and
must specifically address compensation arrangement between
TARP recipient and executive
 TARP recipient must fully disclose to Special Master identity of
any similarly situated executives and, to extent requested by
Special Master, include those executives in the request for the
Advisory Opinion
For this purpose, SEO and next 20 executives will not be treated as
similarly situated to next 26 through 100 top executives
Advisory Opinion must explicitly set forth a (1) revised time and
form of payment that would otherwise have complied with
409A, (2) condition or payment that is directly related to the
financial assistance received by the TARP recipient to repay
the TARP assistance or (3) combination of both (1) and (2)
Notice 2009-92
 Requirements
for 409A Relief
Advisory Opinion must not permit the TARP recipient or
executive to elect another time or form of payment other than in
a manner compliant with 409A (the decision to repay some or
all of the TARP assistance will not be treated as an election as
to the time and form of payment)
 The TARP recipient and executive must enter into a written
agreement containing the revised time and form of payment
and any applicable conditions on payment no later than end of
executive’s tax year in which the Advisory Opinion is issued or
the 15th day of the third month following the date the Advisory
Opinion is issued, if later
 TARP recipient and executive comply with the Advisory Opinion
in all material respects
Notice 2009-92
 Relief
from 409A
Failure to pay on the originally designated payment date will
not be treated as an impermissible initial deferral election or
subsequent deferral election under 409A
 If Advisory Opinion requires a change in payment of an amount
that otherwise qualifies as a short-term deferral under 409A to
a time or form that would cause such amount to be treated as
deferred compensation subject to 409A, the amount will be
treated as deferred compensation under 409A once the change
to the time and form of payment has been made
Exception: If the Advisory Opinion requires only that the payment of
such amount be delayed until specified TARP-related conditions are met,
and does not otherwise prescribe changes in the time and form of
payment, such condition will not cause the amount to fail to qualify as a
short-term deferral as long as the amount is paid at the earliest date at
which the executive anticipates or reasonably anticipates that the
payment would be permissible under the Advisory Opinion
Notice 2009-92
 Relief
from 409A
Early payments (payments before the original payment date)
pursuant to the Advisory Opinion or EESA will be treated as
permissible accelerations
 This includes early payments upon repayment of TARP
Once the TARP recipient and executive have agreed to the
revised time and form of payment pursuant to the Advisory
Opinion in writing, the revised time and form of payment is
treated as the time and form of payment for purposes of
determining future compliance with 409A