The Federal Stimulus Package's Impact on Executive Compensation

Summary: 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 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.

Author Laurie Leader writes: 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.

The ARRA imposes limits on executive compensation based on unnecessary and excessive risk-taking.  The statute provides that the compensation of Senior Executive Officers ("SEOs") must not include incentives to take "unnecessary and excessive risks" that could threaten the value of TARP recipients while their TARP obligations remain outstanding. "Senior Executive Officers" are defined to include the chief executive officer, the chief financial officer, and the three most highly paid executive officers, as determined under federal securities law.

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TARP recipients cannot make golden parachute payments to the SEOs and any of the next five most highly compensated employees until all of the TARP funding have been repaid.  Similarly, tax gross-ups cannot be awarded to the SEOs and the twenty next most highly compensated executives, even if the payment is to be made after the TARP period ends.  A "tax gross-up" means any payment designed to cover all or some of the executive's income taxes that will be owed on all or part of the compensation received.  The fact that the prohibition against tax gross-ups extends beyond the TARP period underscores the perception that tax gross-ups are unfair or, at a minimum, the subject of repeated abuse.

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