The NASPP Blog

Background:

Recipients of Troubled Assets Relief Program (TARP) funds may be finding it hard to keep up with the restrictions associated with their participation. The TARP was introduced as a part of the Emergency Economic Stabilization Act of 2008 (EESA), which I blogged about in November. The EESA offers several ways for financial institutions, large and small, to gain access to funds. Access to funds comes with initial restrictions attached, many of which impact the stock plan administration of those companies. These restrictions include limits on senior executive severance benefits & 162(m) tax deductions as well as the requirements for certain claw-back provisions and to have a board Compensation Committee to oversee compensation strategies that should include measures to curb inappropriate risk-taking.

Companies that participate in the TARP are also now subject to additional restrictions through new Treasury statements in 2009 and the American Recovery and Reinvestment Act of 2009 (ARRA), which I blogged about in April of this year. This legislation focuses on executive compensation, moving to provide greater transparency and control to shareholders through certification requirements, executive compensation disclosure, say on pay, and limited bans on parachute payments and luxury expenditures. The ARRA also makes an important distinction between regular participants in the TARP, and those who receive exceptional assistance. It also provides a way for participating companies to release themselves from these restrictions by repaying TARP funds, which some companies have already done – see Ten Major Banks Repay $68 Billion in TARP Funds (CNBC June 17, 2009).

Interim Final Rule

The various regulations governing TARP recipients were consolidated by the Treasury on June 10, 2009 when it issued the Interim Final Rule (IFR). TARP recipients are subject to different levels of restrictions based on which program they are participating in and the size of the assistance they receive. Fortunately, the Interim Final Rule appoints a Special Master to help companies determine the applicable regulations and review executive compensation for participating companies. As it stands now, participating companies may be subject to the certain restrictions for senior executive officers (SEOs) or the next most highly compensated employees (HCEs). The IFR:

Prohibits

• “golden parachute” payments to SEOs and the next five HCEs
• bonus payments to SEOs and certain other HCEs, with the exception of certain restricted stock awards that meet the qualifications for the exception or other qualifying bonus payments that were legally binding through a contract on or before February 11, 2009
• compensation plans that encourage “unnecessary and excessive risk” by SEOs
• tax gross-ups to SEOs and the next 20 HCEs, except for payments under tax equalization agreements

Requires:

• clawback provisions for bonuses paid to SEOs and the next 20 HCEs that are found to have been based on materially inaccurate performance criteria
• “say on pay” non-binding shareholder vote applicable to proxy statements filed with the SEC after February 17, 2009
• implementation of a corporate policy on excessive or luxury expenses;
• disclosure of the use of any compensation consultant including the specific services provided and methods employed by the compensation consultant
• disclosure of any perquisite with a total value exceeding $25,000;
• certification by the CEO and CFO that the company is in compliance with all compensation and corporate governance requirements

Additional Ramifications
In addition to the IFR, the Treasury also expressed support for the SEC in its pursuit to impose similar executive compensation and corporate governance reforms for all companies, not just for TARP recipients.

On July 1, 2009, the SEC voted to move forward (see the SEC Press Release) with plans to improve corporate executive compensation disclosures (as outlined in the June 10th Press Release), in addition to modifying proxy disclosure to be in line with the IFR requirements for TARP recipients.

I think that all companies should be paying attention to the requirements made on TARP recipients. Congress and the current Administration appear to be moving towards implementing reforms for all companies to guide corporate governance and align executive compensation with company performance. Now is the time to review your company’s compensation philosophy and equity compensation programs and begin implementing changes that keep personal performance goals in line with company performance. Additionally, it is time to take a look at “say on pay” to determine if it’s right for your company now.

We have some great workshops at our upcoming 17th Annual NASPP Conference in November, including “The Economy and Your Stock Plans: New Approaches to Granting and Paying Out Equity Awards” and “Coming Regulatory Reform: Impact of Risk Assessment on Pay (and Other Repercussions)”. The upcoming changes could impact you; don’t miss out on these great opportunities to see how your company can be ahead of the game. Also, keep abreast of the TARP standards in our Economic Stimulus Legislation Portal.

-Rachel