Executive compensation provisions of the American Recovery and Reinvestment Act of 2009 | Practical Law

Executive compensation provisions of the American Recovery and Reinvestment Act of 2009 | Practical Law

Executive compensation provisions of the American Recovery and Reinvestment Act of 2009

Executive compensation provisions of the American Recovery and Reinvestment Act of 2009

by Doreen E. Lilienfeld, Amy B. Gitlitz and Veronica M. Wissel, Shearman & Sterling LLP
Published on 05 Mar 2009 • USA
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The new American Recovery and Reinvestment Act of 2009 expands restrictions on executive compensation that apply to entities participating in the TARP. This article summarises the key provisions of the Act.
On 17 February 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. The Act expands restrictions on executive compensation applicable to entities that participate in the Troubled Assets Relief Program (TARP). The Act applies to all entities that have received or will receive financial assistance, but in certain instances permits entities to withdraw from TARP and avoid the new restrictions. Many of the new restrictions under the Act seemingly also apply to non-executive employees as well as to senior executive officers (SEOs).
  • Prohibition on severance. TARP recipients cannot make golden parachute payments to an SEO or any of the next five most highly-paid employees while the company has outstanding obligations to the government. A golden parachute is defined as any payment on a departure for any reason, other than payments for services performed or benefits accrued.
  • Limits on incentive compensation. TARP recipients cannot pay or accrue any bonus, retention award or incentive compensation other than "long-term restricted stock" that:
    • does not fully vest until the government has been repaid;
    • has a value not greater than one-third of the employee's total annual compensation; and
    • complies with other terms and conditions set by the US Department of Treasury (Treasury).
    The prohibition applies to a number of employees that is determined by the amount of assistance received. Notably, bonus payments to be paid under a written contract executed on or before 11 February 2009 are excepted.
  • Clawbacks. TARP recipients must adopt clawback policies to recover compensation paid to their SEOs and the next 20 most highly compensated employees if the pay is based on criteria later found to be materially inaccurate.
  • Prior payments. The Act requires the Treasury to review all compensation previously paid to the SEOs and the next 20 most highly paid employees of any TARP recipient to determine whether the payments were inconsistent with the Act or TARP, or were otherwise contrary to the public interest. In that case, the Treasury must negotiate with the TARP recipient and the employee for reimbursement of the compensation to the government.
  • Say-on-pay. TARP recipients must implement a say-on-pay policy, allowing for an annual non-binding shareholder vote on executive compensation.
  • Luxury expenditures. Each TARP recipient must adopt a policy related to the approval of excessive or luxury expenditures.
  • Other standards. TARP recipients must structure compensation arrangements to exclude both:
    • incentives for SEOs to take unnecessary and excessive risks that threaten the value of the company; and
    • benefits that "would encourage manipulation of the reported earnings."
  • Prohibition on hiring non-immigrant employees. The Act prohibits any company that receives assistance from hiring any non-immigrant workers under the H-1B visa program for two years unless the company qualifies as an H-1B-dependent employer.
New regulations providing further guidance on the Act are to be issued by the Treasury.
For more information on the Act and its implications for executive compensation planning, see Executive Compensation Restrictions on TARP recipients Under the Economic Stimulus Bill.