Determinations

On October 22nd, the Treasury’s Special Master for TARP Executive Compensation announced his determinations on the compensation packages of the executive officers and most highly paid employees at the seven companies under his review. Some of the changes that he requires of these companies are surprisingly significant.

Aligning with Shareholder Interests

We’ve seen a real push recently to encourage companies to structure compensation, for executives in particular, in a way that better protects shareholder interests. Government initiatives include say on pay, compensation committee independence, and assessment of how compensation programs may lead to excessive risk-taking. What truly stands out about these determinations is that when the government is given the opportunity to directly influence compensation structure, it has turned to equity compensation as the solution.

Cash is not King

The Special Master’s rulings drastically reduced the cash compensation received by the most highly paid individuals at the companies under his review. For AIG, Bank of America, and General Motors, cash compensation was reduced by more than 90%! In lieu of cash, these employees will receive vested stock that comes with very specific holding requirements intended to ensure repayment of TARP funds and continued financial stability for these companies. These percentages are so high because cash compensation is capped at $500,000 for most of the relevant employees.

Performance and Holding Requirements

In addition to this major shift from cash to equity in base salary, the Special Master’s determinations also impose a pretty specific structure for incentive compensation. He looks to performance-based restricted stock with minimum vesting periods as well as holding requirements on the vested stock. This two-pronged approach is designed to encourage specific outcomes in company performance as well as adjust the focus of top employees from short-term gain to long-term growth.

The Big Picture

Companies will be taking a look at how the Treasury has dealt with executive compensation at these seven companies and trying to decide what that means to them directly. What these determinations do is give us a window into exactly what the Treasury feels is a compensation structure that aligns executives with shareholder interest and discourages excessive risk-taking for short-term gain. Other companies will want to keep that in mind as they review their own executive compensation structures.

For the Equity Compensation Professional

These determinations mean that more companies will be reviewing their own compensation practices. The savvy stock plan administrator will be looking for a way to at least be a part of the conversation so that the grants come out of any new compensation structure can be managed without exposing the company to additional risk due to excessively complex features. Get some guidance on how to do this at our NASPP Conference Session, Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant. Since it’s pretty clear that restricted stock, performance-based vesting, and some way to encourage top employees to hold onto their company stock as a long-term investment are looked upon as favorable practices, stock plan managers will want to reach out and learn as much as they can about administering plans with these features.

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-Rachel