Facing TARP Head On!
By Marc Sandberg
March 9, 2009
TARP is the Troubled Asset Relief Program, which was established under the Emergency
Economic Stabilization Act of 2008 (EESA). The language of TARP was then amended in
the American Recovery and Reinvestment Act (ARRA), which was signed by President
Obama on February 17, 2009. Regulations to carry out the intent of these will be drafted in
the near future. TARP recipients should be acting now to limit the adverse impact to their
compensation plans. These limits apply to the CEO and the next 5 most highly-
compensated employees (Senior Executive Officers (SEOs)).
All TARP recipients are required to adapt their compensation plans in accordance with
certain standards. Most of these changes are non-controversial, such as claw backs,
independent Compensation Committee members, and limits on luxury expenditures.
The more dramatic changes are:
Say-on-Pay - All TARP recipients must institute a say-on-pay policy, which is a non-
binding advisory vote by shareholders on executive compensation plans as disclosed in the
CD&A section of the annual Proxy filings. Boards are not required to follow the results of
the shareholder vote, but are strongly encouraged to do so. Say-on-pay has had numerous
mentions from institutional investors in the recent past, but this mandate may encourage the
SEC to pay more attention to this area. Fortunately, the SEC has already indicated that this
vote could be held in conjunction with the annual proxy process.
Incentive Plans – TARP prohibits any bonus or incentive compensation other than long-
term restricted stock. The restricted stock cannot fully vest while TARP funds are still
owed. Query whether partial vesting will be permitted while TARP funds are still owed?
The amount of the grant is also limited to not greater than 1/3 of the receiving employee’s
total annual compensation. The executives to whom these limits on incentives applies,
depends on how much in TARP funds the company has received. The number ranges on a
scale between 1 and 20, but each level includes an ominous clause that states “or such
higher number as the Secretary may determine is in the public interest”. The rules refer to
current existing contracts which may remain in place.
Golden Parachutes – TARP eliminates any golden parachute payment made to an SEO
while TARP funds are still owed. “Golden parachute payment” is defined as “any payment
to a senior executive officer for departure from a company for any reason, except for
payments for services performed or benefits accrued.”
Retroactive Review of Executive Compensation - The Treasury is required to review all
“bonuses, retention awards, and other compensation” paid out to SEOs and the next 20
most highly-compensated employees for each TARP recipient to “determine whether such
payments were inconsistent with” the purposes of TARP or contrary to the public interest.
If the Treasury finds inconsistency, they have the power to negotiate appropriate
reimbursement from the company and the executive to the federal government. While most
people believe that the Treasury is only going to be reviewing 2008 and 2009 bonuses,
there is no actual time limit to retroactivity set out in the legislation. The Treasury retains
the right to review any compensation practices for the applicable employees going back in
Waiting for the Other Shoe to Drop?
These limits were passed amongst loud grandstanding by certain members of Congress, not
the best atmosphere for drafting reasoned legislation. The further regulations to be drafted
by the Treasury will be written in a somewhat more reasonable process. Going forward,
one option is to hold your breath until the details of Geithner's stress test are known, in
order to immediately repay their portion of TARP and escape from these rules.
However, this approach assumes that the company will have the means and ability to pass
the stress test. The second alternative is to become involved in the development of these
The topics which Congress delegated to Treasury on which they will be issuing further
guidance may include:
1) The vesting rules permitted under the Restricted Stock plan
2) The deductible compensation limits passed last October ($500,000)
3) What grandfathered incentive contracts and employment contracts will be permitted
to stay in force
4) What severance benefits may be paid to an executive upon termination
5) The process of review over past compensation practices and amounts.
Currently, the atmosphere at the beginning of the process has been polluted by the Merrill
Lynch bonuses, the AIG bonuses and other actions. These do not reflect kindly on the
majority of the financial institutions. The failure to counteract these stories will color any
future action taken by Treasury. The companies that are taking reasonable and measured
actions need to become involved, so that future restrictions handed down by Treasury will
be tempered by good judgment.
What does that require?
The regulations and guidance will be drafted by staff within the Treasury Department. The
people on this staff will need data and background so that they understand the business and
the people issues involved. The staffs that will be involved in creating these regulations do
not have a compensation background and do not realize the many competing considerations
that go into a well designed plan. The overriding imperative they are operating under is
that the executives are paid too much!
The staff will need to appreciate that companies have to deal with issues such as the
- Attraction and Retention of talented executives (although this may not be a current
problem, given the lack of options for executives, this will change as time goes by)
- Salesmen being paid more than the CEO
- Retiring and terminating executives (employment contract promises)
- Comparative pay scales with non-TARP companies
- Additional certification requirements tied to TARP
If the TARP recipients fail to take action and inject some reason into this process, they will
have nothing to complain about.
Compensation professionals within these companies should be forthcoming with the
background, the reasons, the analysis, and the comparative market data surrounding the
executive positions. They have the tools and the training to assist the regulators to create
well thought out regulations. This help would be furnished to the staffs and other
government persons and in general, would be underneath the radar and of minimal risk.
The larger risk is, of course, waiting for the other shoe to drop!