Stimulus Bill Extends TARP Limits on Executive Compensation

By John R. Cornell et al., of Jones Day Feb 18, 2009

The American Recovery and Reinvestment Act of 2009 (ARRA), widely described as the stimulus bill, was signed into law by President Obama on Feb. 17, 2009. ARRA significantly expands the executive compensation requirements previously imposed under the Emergency Economic Stabilization Act of 2008 (EESA), which established the Troubled Assets Relief Program (TARP).

ARRA's executive compensation restrictions apply to any entity that has received or will receive financial assistance under TARP (a "TARP recipient"), and generally will continue to apply for as long as any obligation arising from financial assistance provided under TARP remains outstanding (the "TARP assistance period"). The TARP assistance period does not include any period during which the federal government only holds warrants to purchase a TARP recipient's common stock.

Section 7001 of ARRA amends Section 111 of EESA in its entirety. Under EESA, Section 111 created different executive compensation restrictions depending on the nature of the assistance received by a TARP recipient and provided broad, general rules that were fleshed out in subsequent guidance issued by the Secretary of the Treasury and the secretary's delegates.

As amended by ARRA, Section 111 provides a more comprehensive, uniform set of rules for all TARP recipients. Yet more agency guidance is a certainty. ARRA left in place EESA's tax deductibility and excise tax provisions.

EESA's executive compensation requirements represent an amalgamation of EESA's prior executive compensation requirements, a number of the proposed executive compensation guidelines announced by the Treasury on Feb. 4, 2009 and a number of the expansive executive compensation requirements contained in the initial U.S. Senate version of the stimulus bill.

It remains to be seen what role or impact the Treasury guidelines will have now that ARRA has become law. For example, the $500,000 annual compensation limit under the Treasury guidelines was not included in ARRA. Treasury may impose that limit, or other limits, on future TARP recipients as a condition to the receipt of further TARP assistance using the ARRA restrictions as a baseline.

The revised executive compensation requirements are summarized as follows:

General Standards

TARP recipients must implement and comply with the following executive compensation and corporate governance standards during the TARP assistance period:

  • Limits on compensation that exclude incentives for senior executive officers to take unnecessary and excessive risks that threaten the value of the TARP recipient.

  • A provision for the recovery by the TARP recipient of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of its next 20 most highly compensated employees based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate. A TARP recipient's "senior executive officers" are its five most highly paid executives whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934 and its regulations (or, for nonpublic companies, comparable employees).

  • A prohibition on the TARP recipient making any golden parachute payment to a senior executive officer or any of its next five most highly compensated employees. A "golden parachute payment" is any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.

  • A prohibition on any compensation plan that would encourage manipulation of the reported earnings of the TARP recipient to enhance the compensation of any of its employees.

Bonus, Retention Award, and Incentive Compensation Prohibition

During the TARP assistance period, TARP recipients are prohibited from paying or accruing any bonus, retention award, or incentive compensation. This bonus/incentive prohibition does not apply to the payment or accrual of long-term restricted stock that meets all these conditions:

  • It does not fully vest during the TARP assistance period.

  • It has a value not greater than one-third of the total amount of annual compensation of the employee receiving the stock.

  • It is subject to such other terms and conditions as the Treasury secretary may determine are in the public interest.

The bonus/incentive prohibition applies to TARP recipients in four tiers based on the amount of financial assistance they receive under TARP:

  • Tier One: The bonus/incentive prohibition applies to only the most highly compensated employee of a financial institution that received less than $25 million in financial assistance.

  • Tier Two: The bonus/incentive prohibition applies to at least the five most highly compensated employees of a financial institution that received at least $25 million but less than $250 million in financial assistance (or such higher number of employees as the Treasury secretary determines is in the public interest with respect to any TARP recipient).

  • Tier Three: The bonus/incentive prohibition applies to the senior executive officers and at least the 10 next most highly compensated employees of a financial institution that received at least $250 million but less than $500 million in financial assistance (or such higher number of employees as the Treasury secretary determines is in the public interest with respect to any TARP recipient).

  • Tier Four: The bonus/incentive prohibition applies to the senior executive officers and at least the 20 next most highly compensated employees of a financial institution that received $500 million or more in financial assistance (or such higher number of employees as the Treasury secretary determines is in the public interest with respect to any TARP recipient).

In the case of all TARP recipients, the bonus/incentive prohibition does not prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before Feb. 11, 2009; the Treasury secretary or his designee are empowered to determine the validity of such employment contracts.

Board Compensation Committee

TARP recipients must establish a board compensation committee that:

  • Is composed entirely of independent directors.

  • Meets at least semiannually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans.

If the TARP recipient's common or preferred stock is not registered under the Exchange Act, and the TARP recipient has received $25 million or less in financial assistance under TARP, these responsibilities are to be carried out by the TARP recipient's board of directors.

Luxury Expenditures Limitation Policy

Each TARP recipient's board of directors must have in place a company-wide policy regarding excessive or luxury expenditures, as identified by the Treasury secretary. The expenditures may relate to:

  • Entertainment or events.

  • Office and facility renovations.

  • Aviation or other transportation services.

  • Other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives, or other similar measures conducted in the TARP recipient's normal course of business operations.

Nonbinding Shareholder Votes on Executive Compensation

Each TARP recipient must permit a separate shareholder vote to approve the TARP recipient's executive compensation, as disclosed in the TARP recipient's Compensation Discussion and Analysis, related compensation tables and other related material under the Securities and Exchange Commission's (SEC) compensation disclosure rules, in any proxy, or consent or authorization for an annual or other meeting of its shareholders during the TARP assistance period (a "say on pay vote"). The say on pay vote will not be binding on or overrule any decisions by the TARP recipient's board of directors, will not create or imply any additional fiduciary duty on the part of the board, and will not restrict or limit the ability of the TARP recipient's shareholders to make proposals for inclusion in proxy materials related to executive compensation.

The SEC is to issue any required final rules and regulations related to the say on pay vote requirement not later than one year after the date of enactment of ARRA.

Review of Prior Payments to Executives

The Treasury secretary is directed by Congress to review bonuses, retention awards, and other compensation paid to the senior executive officers and the next 20 most highly compensated employees of each entity receiving TARP assistance before the date of enactment of ARRA to determine whether any such payments were inconsistent with the purposes of the revised executive compensation requirements or TARP, or were otherwise contrary to the public interest. If the Treasury secretary makes such a determination, he is directed to seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursements to the federal government with respect to compensation or bonuses.

Certification of Compliance with Revised Requirements

Each TARP recipient's chief executive officer and chief financial officer (or their equivalents) must provide a written certification of the TARP recipient's compliance with the requirements of revised Section 111 of EESA to the SEC in its annual filings required under the securities laws (or, in the case of a nonpublicly traded company, to the Treasury secretary).

Other Provisions

There is an easier mechanism for TARP recipients to repay any assistance they have previously received under TARP and withdraw from TARP without replacing TARP funds.


There is no stated effective date for ARRA's executive compensation requirements. However, the Treasury secretary is directed to promulgate regulations to implement the revised executive compensation requirements.

Originally published by Jones Day. Reposted with permission.

This article was written by John R. Cornell, Daniel C. Hagen, Dennis B. Drapkin, Louis Rorimer, Rory D. Lyons, Manan Shah, Stephen P. Coolbaugh, attorneys with the national law firm Jones Day. This article originally appeared as a Jones Day Commentary.

This publication should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only.

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