Executive Compensation and the Economic Stimulus Act

The "Treasury Guidelines" and the American Recovery and Reinvestment Act of 2009 ("ARRA") include its own restrictions on compensation in financial firms that receive government aid. Prof. Fanto identifies several uncertainties arising from the Act and the Guidelines. This article highlights the consequences of the restrictions for executives, and includes a discussion of the broader implications for all companies receiving federal assistance.
Professor Fanto writes: Executive compensation is a "hot button" issue in financial institutions that have received, and will receive, investments and support from the federal government. The financial industry richly compensates its participants, which probably explains why so many talented individuals, who could have pursued other careers, flock to finance. When financial institutions began to fail or to get close to insolvency as a result of the financial crisis, the outsized compensation arrangements of their chief executive officers ("CEOs") and other senior executives, which generally included rich severance arrangements, came before the public eye. Public outrage was sparked when it was revealed that Merrill Lynch, which, on the verge of collapse, had been forced into a shotgun merger with Bank of America and which, with Bank of America, had received $25 billion under the Troubled Asset Relief Program ("TARP"), had rushed to pay over $3.6 billion in bonuses before completion of that merger at the end of 2008. This payment was made despite the fact that Merrill had lost over $15 billion for the 2008 fourth quarter and Bank of America had to request additional extraordinary government support in light of Merrill’s poor financial condition. That it was also revealed that Merrill’s CEO John Thain had spent extravagantly to decorate his office demonstrated to all that compensation and perquisites were out of control among executives and other senior personnel in the financial industry.

The Bush Administration had obtained funds to support financial institutions in the Emergency Economic Stabilization Act of 2008, which had established the TARP. But that Act had imposed few executive compensation restrictions upon recipients of funds. Shortly after assuming power, the Obama Administration, through the U.S. Treasury Department, responded to the growing public outrage over senior-level compensation in the financial sector by imposing restrictions on it under various pronouncements and guidelines issued by that Department. No sooner had the Treasury released its most detailed guidelines on the subject (the "Treasury Guidelines")  than Congress passed, and the President signed into law, the American Recovery and Reinvestment Act of 2009 ("ARRA"). The ARRA included its own restrictions on compensation in financial firms that receive government aid.

This comment highlights the resulting restrictions from a combination of the Treasury Guidelines and the ARRA. It also identifies several uncertainties arising from the statute and the Guidelines. In particular, it looks at the following topics: basic coverage of the restrictions, the limits on compensation, golden parachutes, the power to "clawback" bonuses, luxury spending, qualitative compensation limitations, and the "say-on-pay" shareholder vote. In discussing the topics, the comment will try to highlight the consequences that certain restrictions will have for the senior executives and the financial firms. It concludes with a brief discussion of the broader implications on these restrictions, including their future effect on all companies, not just the financial firms that are receiving federal assistance.
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