New Executive Compensation Rules For Recipients Of TARP Funds – Which Parts Have Immediate Effect?

The expert attorneys at Verrill Dana, a premier lawvalued at no more than one-third of the
firm located in Portland, ME and with offices in Boston,employee’s annual compensation. In this case, the
MA, Hartford, CT and Washington D.C. have publishednumber of employees covered depends upon the
the following article about the implications of the newamount of TARP funds provided to the company. If
compensation rules for recipients of TARP Funds.the company received less than $25 million, this
The American Recovery and Reinvestment Act ofrestriction applies only to the single most
2009 ("ARRA"), signed into law by President Obamahighly-compensated employee. If the company
on February 17, 2009, subjects all companies thatreceived $25 million to $250 million, the restriction
receive federal funding under the Troubled Assetsreaches at least the 5 most highly-compensated
Relief Program ("TARP") to new rules governingemployees; if it received $250 million to $500 million, at
executive compensation practices. Generally, theleast the top 5 executives plus the 10 next most
relevant restrictions will apply for so long as thehighly-compensation employees; and if $500 million or
particular company continues to have any obligationsmore, at least the top 5 executives plus the 20 next
arising from financial assistance provided under TARP.most highly-compensated employees. Except in the
Virtually all TARP recipients will need to reexamineunder-$25 million category, ARRA gives Treasury
their executive compensation programs and practicesauthority to specify a greater number of covered
as a result of these new requirements.employees. TARP recipients that pay bonuses in
ARRA requires the U.S. Department of the Treasuryinstallments throughout the year may wish to examine
to promulgate regulations to require TARP recipientswhether to substitute long-term restricted stock grants
to meet appropriate standards for executive– the one form of bonus compensation permitted to
compensation and corporate governance. Those rulescovered executives under this particular provision of
will obviously affect the design of compensationARRA.
changes that TARP recipients ultimately make. In* In structuring bonus compensation for 2009, TARP
some important respects, however, ARRA arguablyrecipients should seek specific legal advice on whether
has immediate effect. In particular:the bonus should be made subject to a clawback
* TARP recipients should seek specific legal adviceprovision. ARRA requires Treasury to provide for
before paying any form of severance bonus to any ofrecovery of any bonus, retention award, or incentive
the top 5 executive officers or any of the next 5 mostcompensation to any of its top 5 executives or any of
highly-compensated employees. ARRA calls for athe next 20 highest-paid employees if paid on the
prohibition against "golden parachute" payments tobasis of "earnings, revenues, gains, or other criteria"
such individuals, and defines "golden parachutethat are later found to be "materially inaccurate."
payment" very broadly to include "any payment to aBecause the scope and timing of these requirements
senior executive officer for departure from ais presently uncertain, TARP recipients should consider
company for any reason, except for payments formaking the payments recoverable by contract where
services performed or benefits accrued" (emphasisnecessary or advisable to assure company
added). Contracts with Treasury under the Capitalcompliance.
Purchase Program originally prohibited golden* Nonpublic TARP recipients should seek specific legal
parachute arrangements exceeding three times theadvice on whether to include a "say on pay" resolution
executive’s base compensation. ARRA can beat this year’s annual meeting of shareholders. As
read to be self-executing. On February 4, 2009has been well-publicized, the Securities and Exchange
(before ARRA), Treasury had published rules furtherCommission published guidance to the effect that
restricting the amount to one times basepublic companies that are TARP recipients must
compensation, but only for companies receivinginclude "say on pay" proposals in any annual meeting
"exceptional assistance" under TARP. ARRA’sproxy statement filed with the Commission after
requirement of an outright prohibition could conceivablyFebruary 17, 2009. It is far from clear whether a say
be given retroactive effect, but in the meantime manyon pay requirement should be read to apply
interpretational questions remain, such as: Will thisimmediately to nonpublic companies, and despite
restriction reach post-termination consulting ornumerous inquiries, neither Treasury nor any federal
noncompetition payments? May TARP recipientsbanking regulators have yet published advice on this
devise restricted stock awards to take the place ofquestion. In the absence of such guidance, nonpublic
severance payments?companies are left to guess about the scope of
* TARP recipients should seek specific legal advicedisclosures that they would be required to make to
before paying or accruing incentive compensation to itstheir shareholders. Nonpublic companies are not
top earners. ARRA calls for a prohibition againstsubject to the SEC rules referenced by ARRA, and
accruing or paying any "bonus, retention award, orthe SEC staff has, understandably, disclaimed
incentive compensation" to top-tier employees, otherresponsibility for or jurisdiction over the disclosure or
than in the form of long-term restricted stock grantsgovernance practices of these nonpublic companies.