US limits executive pay in government supported banks

The Treasury says that the "guidelines" (as we will see below, they are, in effect, compulsory) "are designed to ensure that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial system and not toward inappropriate private gain."

The guidelines distinguish between banks participating in any new generally available capital access programme and banks needing "exceptional assistance." Generally available programmes have the same terms for all recipients, with limits on the amount each institution may receive and specified returns for taxpayers.

If a firm needs more assistance than is allowed under a widely available standard programme, then that is exceptional assistance. Banks falling under the "exceptional assistance" standard have bank-specific negotiated agreements with Treasury. Examples include AIG, and the Bank of America and Citi transactions under the Targeted Investment Programme.

The chief executive officers of all companies that have to this point received or do receive any form of government assistance must provide certification that the companies have strictly complied with statutory, Treasury, and contractual executive compensation restrictions. Chief executive officers must re-certify compliance with these restrictions on an annual basis. In addition, the compensation committees of all companies receiving government assistance must provide an explanation of how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.

Current programs providing exceptional assistance to financial institutions forbid recipients of government funds from taking a tax deduction for senior executive compensation above USD500,000. Today's guidance takes this restriction further by limiting the total amount of compensation to no more than USD500,000 for these senior executives except for restricted stock awards.

Any pay to a senior executive of a company receiving exceptional assistance where that pay exceeds USD500,000 must be made in restricted stock or other similar long-term incentive arrangements. The senior executive receiving such restricted stock will only be able to cash in either after the government has been repaid – including the contractual dividend payments that ensure taxpayers are compensated for the time value of their money – or after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards.

A company receiving exceptional assistance must have in place provisions to claw back bonuses and incentive compensation from any of the top 25 senior executives if they are found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate their own incentive pay.

The top ten senior executives are prevented from receiving a golden parachute, and the next 25 are banned from receiving any golden parachute that exceeds one year's compensation.

The boards of directors of companies receiving exceptional assistance from the government must adopt a company-wide policy on any expenditures related to aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events. This policy is not intended to cover reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to a company's normal business operations. These new rules go beyond current guidelines, and would require certification by chief executive officers for expenditures that could be viewed as excessive or luxury items. Companies should also now post the text of the expenditures policy on their web sites.

The full statement is at BizNewsSelect (click tab above)