TARP’s Special Master

Posted on 04/21/2010

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Entities subject to the executive compensation and governance requirements of Section 111 of the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”), may also be subject to the oversight of the Special Master for Executive Compensation.  The Special Master has authority to interpret section 111, and contractual provisions between the Federal government and a recipient of financial support under the Troubled Asset Relief Program (“TARP”).  

The Special Master has broad authority to control or otherwise modify compensation practices of certain firms receiving exceptional levels of financial assistance under TARP.  His oversight is expected generally to reform pay practices for top executives in ways that align compensation practices so as to support future financial stability, and to better serve shareholder interests.  His authority is aimed at: reducing excessive compensation generally and restricting short-term cash payouts; and, restructuring salary and incentive pay practices to be long-term and tightly tied to performance. 

The Special Master’s power is exercised through non-binding advisory opinions, determinations, and direct negotiations and affects the compensation practices of the largest seven firms receiving exceptional financial assistance, with particular impacts on the largest four.  At the four largest firms receiving exceptional assistance, the top 100 most highly compensated employees will see their compensation impacted by such determinations, while the next three largest firms (thereby enveloping the “seven largest”) will see only their top 25 executives impacted. 

Impacts on the top 25 at all seven firms include: (1) Pay practice reforms which reject short-term performance cash bonuses, and restructures guaranteed cash payments into long-term stock holdings; (2) Decreases of cash compensation by 90% from 2008 levels, limits on cash salaries to $500,000, and a decrease on average total compensation by 50%; (3) Salaries paid in the form of company stock held over the long term, where stock becomes immediately vested and may only be sold in 1/3 increments; (4) Incentive compensation paid in the form of long-term restricted stock, and based on the achievement of performance-based goals, three years of service, and the repayment of TARP funds; and (5) The examination and realignment of pay practices with shareholder interests through the capping of perquisites and other compensation, the further limiting of golden parachute payments, and the freezing of supplemental executive retirement plans.

Additionally, impacts on the next 26 through 100 most highly paid employees at four of the seven firms receiving exceptional assistance will include: (1) Pay structures which strictly tie incentive compensation to performance goal achievement, put a focus on long-term value creation, and allow clawback of pay where results prove illusory; (2) Cash salary limitations of $500,000, and 45% of total compensation; (3) Requirements that 50% of compensation be held for three years, that 50% of incentive pay be in the form of long-term stock grants, and that cash incentives be delivered over a two year period; and (4) The prohibition of tax gross ups, limitations on excessive perquisites, and freezes on excessive severance and retirement pay.

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