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11/23/2009 01:19:19 PM EST

The Federal Stimulus Packages Impact on Executive Compensation

Posted by

Laurie E. Leader

 
While TARPs requirements are technically limited to the most highly paid employees in the companies receiving TARP funds, they promise to have far-reaching implications for executive compensation best practices. This Emerging Issues Analysis discusses the current requirements for executive compensation under TARP, their potential long-range effects and provides practical advice for the compensation committees of non-TARP recipients as well.

Excerpt: Many attribute the troubled economy to corporate greed and executive compensation gone haywire. It is, therefore, not surprising that recipients of federal financial assistance under the Troubled Assets Relief Program ("TARP") must revamp their executive compensation practices as a condition to receipt of such funding. While TARP's requirements are technically limited to the most highly paid employees in the companies receiving TARP funds, they promise to have far-reaching implications for executive compensation best practices. This commentary discusses the current requirements for executive compensation under TARP and their potential long-range effects.

Executive compensation practices are under scrutiny. News of the multimillion-dollar bonuses paid to executives at AIG and other financial institutions created a public outcry about corporate waste, irresponsibility and greed. President Obama told bankers receiving bailout funds that such bonuses were unacceptable, particularly in light of the millions of Americans struggling to pay mortgages. Against this backdrop, the strings attached to TARP monies are only a start to addressing the bigger problems corporate accountability and the need to key pay to performance. Stated differently, TARP reforms are a step in the right direction. Not only have these reforms opened boardroom dialogue on the topic of executive compensation, they have focused public attention and the media on corporate abuses and the link between such abuse and the country's financial stability.

TARP's Restrictions on Executive Compensation

In response to what has been called the greatest economic crisis since the Great Depression, Congress passed the Emergency Economic Stabilization Act of 2008 ("EESA"). The Act imposes limitations on executive compensation at financial institutions which accept federal assistance under TARP. Those limitations were substantially revised by the American Recovery & Reinvestment Act of 2009 ("ARRA"). Most recently, the Treasury Department issued guidance on compensation and governance standards applicable to companies that have received TARP assistance.[footnotes omitted]
 
 
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