October 14, 2008
2008-10-14-9-5-0-19994
Treasury Announces Executive Compensation Rules Under the Emergency Economic Stabilization Act
Washington- The U.S. Treasury Department today announced
the development of three programs under the Emergency Economic
Stabilization Act and corresponding executive compensation and
corporate governance standards. These standards generally apply to the
chief executive officer, chief financial officer, plus the next three
most highly compensated executive officers. Any firm participating in
the following three programs will be required to adopt these standards.
Troubled Asset Auction Program- Treasury continues to
develop a program to purchase troubled mortgage-related assets through
an auction format, and will be issuing program guidance for this
program in the coming weeks. Treasury is issuing guidance for the
executive compensation requirements that will apply to firms
participating in this program. As prescribed by the Act, any financial
institution that sells more than $300 million of troubled assets to the
Treasury via an auction would be prohibited from entering into new
executive employment contracts that include golden parachutes for the
term of the program. Treasury is releasing Treasury Notice 2008-TAAP
regarding this restriction. Furthermore, under the Act, (1) the
financial institution may not deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive, (2) the
financial institution may not deduct certain golden parachute payments
to its senior executives and (3) a 20-percent excise tax will be
imposed on the senior executive for these golden parachute payments.
Treasury is releasing I.R.S. Notice 2008-94 regarding these new tax
rules.
Capital Purchase Program- The Treasury is issuing
guidance for this program designed to provide equity capital under
standardized terms directly to certain financial institutions, further
strengthening their capital structures to facilitate their continued
lending in the capital markets. Any financial institution participating
in the Capital Purchase Program will be subject to more stringent
executive compensation rules for the period during which Treasury holds
equity issued under this program. The financial institution must meet
certain standards, including: (1) ensuring that incentive compensation
for senior executives does not encourage unnecessary and excessive
risks that threaten the value of the financial institution; (2)
required clawback of any bonus or incentive compensation paid to a
senior executive based on statements of earnings, gains, or other
criteria that are later proven to be materially inaccurate; (3)
prohibition on the financial institution from making any golden
parachute payment to a senior executive based on the Internal Revenue
Code provision; and (4) agreement not to deduct for tax purposes
executive compensation in excess of $500,000 for each senior executive.
Treasury is issuing interim final rules for these executive
compensation standards.
Programs for Systemically Significant Failing Institutions-
The Treasury Department is currently developing a third program to
potentially provide direct assistance to certain failing firms on terms
negotiated on a case-by-case basis. Treasury is issuing guidance for
the executive compensation standards that will apply to the firms
participating in such programs and their senior executives (Treasury
Notice 2008-PSSFI). These standards are similar in all respects to the
Capital Purchase Programs executive compensation standards described
above, with one significant difference. In situations where Treasury
provides assistance under the systemically significant failing
institutions programs, golden parachutes will be defined more strictly
to prohibit any payments to departing senior executives.
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