Executive Compensation Provisions In Bailout Bill - A Sign of More Changes On Horizon?

Cynthia Stamer
October 21, 2008 — 1,694 views  
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The landmark Emergency Economic Stabilization Act of 2008 (the "Act") signed by President Bush today (October 3, 2008) includes restrictions on executive compensation arrangements for "senior executives" of financial institutions selling assets to the Treasury Department pursuant to the Act.  While narrow in applicability, the discussion surrounding their enactment suggests that Congress will consider broader executive compensation reforms soon. In response to signals that Congress will act to more broadly regulate executive compensation, corporations and executives should prepare to respond to further regulatory changes impacting their executive compensation practices even as they struggle to comply with new deferred compensation and executive compensation rules under Internal Revenue Code section 409A and Sarbanes-Oxley.

Executive Compensation Regulations In Act

The possibility that the Act would allow the Treasury Department to take over failing assets of struggling financial institutions while allowing executives to claim rich severance or other executive compensation benefits was among the concerns that some House members mentioned frustrated previous efforts by the House to pass the "bailout" legislation on Monday. While the Act imposes certain restrictions on executive compensation arrangements for financial institutions selling assets to the Treasury Department pursuant to the Act, it stops short of requiring across the board forfeiture of such compensation by key executives of financial institutions involved in such sales.

Under Section 111 of the Act, the specific executive compensation and corporate governance requirements applicable as a result of a bailout transaction depend on whether the sale of assets by the financial institution to Treasury occurs through a direct purchase or auction. 

Where the Treasury Secretary makes auction purchases of troubled asset from a financial institution, the Act requires that the Secretary prohibit the financial institution from entering into any new employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership if the assets purchased by the Treasury from that financial institution in the aggregate exceed $300,000,000 (including direct purchases and purchases by auction).  The Treasury Secretary must publish regulations implementing this auction sale requirement within 2 months after the date of enactment (December 3, 2008), which will become immediately effective upon issuance.  This provision of the Act is subject to a sunset provision.

In contrast, where the institution sells the assets to the Treasury Department directly without a bidding process or available market price and the Treasury Department through the sale receives a meaningful equity or debt position in the financial institution, the Act requires that the selling institution observe "appropriate standards for executive compensation and corporate governance."   These include:

  • Limits on compensation to eliminate incentives that encourage executive officers to take unnecessary and excessive risks that threaten the value of the financial institution during the period the Secretary holds an equity or debt position in the financial institution; 
  • A provision that allows the financial institution to recover any bonus or other incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; and 
  • A prohibition on the financial institution making any golden parachute payment to its senior executive officers during the period that the Secretary holds debt or equity in the financial institution.

In either case, the restrictions apply to executive compensation arrangements with "senior executives." For purposes of these rules, a "senior executive officer" is defined as an individual who is one of the top five executives of a public company subject to the disclosure requirements of the Securities Exchange Act of 1934, and their counterparts in a non-public company.

Signs of More Executive Compensation Reforms On Horizon

While narrowly focused on failing financial institutions, the Act's provisions restricting executive compensation are reflective of the growing awareness and concern by Congress about perceived compensation abuses by senior executives.

The executive compensation provisions included in the Act are the latest in a series of reforms enacted by Congress targeting these perceived executive compensation for executives in a broad range of contexts such as new deferred compensation rules under Code Section 409A, the golden parachute rules of Code Section 280G, and a host of new executive compensation disclosure rules under Sarbanes-Oxley and other securities regulations.  Discussions about perceived executive compensation abuses in connection with Congressional considerations of the Act and the recent Presidential debates signal that a host of other more broadly applicable executive compensation reforms presently pending before Congress will receive renewed priority and attention in coming months. 

Even as the Act passed Congress, Congress already was considering enactment of additional and more broadly applicable restrictions on executive compensation practices of public and other companies.  For instance, the "Corporate Executive Compensation Accountability and Transparency Act (S. 2866) introduced by Senator Hilary Clinton in April, 2008 re-proposes a variety of executive compensation reforms that in previous years have enjoyed widespread acceptance among many members of the House and Senate.  Its provisions include proposals to:

  • Amend Code Section 409A to restrict the compensation that employees may defer under an executive compensation arrangement to $1 million per year;
  • Amend Sarbanes-Oxley to provide for expanded disclosures to shareholders about executive compensation, compensation consultant activities, and compensation consultant independence;
  • Amend Sarbanes-Oxley to require public companies to obtain a shareholder vote on executive compensation; and
  • Require certain federal contractors to disclose executive compensation structures.

While S. 2866 presently has no co-sponsors and no hearings have been held on its provisions since its introduction, it is likely that it or other Congressional reforms will receive renewed attention by Congress in coming months. Even before the bailout deliberations of the Act drew attention to executive compensation concerns, reforms like those in S. 2866 enjoyed strong support among many members of both the House and Senate.  This support is likely to grow in response to discussions about perceived executive compensation abuses in connection with Congressional considerations of the Act and the recent Presidential debates. 

These developments signal that a host of other more broadly applicable executive compensation reforms like S. 2866 presently pending before Congress will receive renewed priority and attention in coming months.  Potential Congressional action on these proposals should alert corporations and executives to expect new legislative or rule changes that will further complicate their ongoing efforts to update their executive compensation practices to comply with new deferred compensation and executive compensation rules under Internal Revenue Code section 409A and Sarbanes-Oxley reforms. 

Accordingly, as corporations and executives work to redesign and update their existing executive compensation practices to comply with Internal Revenue Code section 409A, Sarbanes-Oxley and other existing rules, they also will need to work to preserve the flexibility to respond to anticipated future reforms into their program design and deliberations.

About Ms. Stamer

Board certified in labor and employment law by the Texas Board of Legal Specialization with more than 20 years human resource and employee benefits experience, management attorney and consultant Cynthia Marcotte Stamer helps businesses manage people, processes, and regulatory exposures to achieve their business and operational objectives and manage legal, operational and other risks. Recognized in the International Who's Who of Professionals and bearing the Martindale Hubble AV-Rating (highest), Ms. Stamer also is a highly regarded legal advisor and consultant, author and speaker, who regularly conducts management and other training on a wide range of employee benefit, human resources and internal controls, and other related risk management matters.  She also shares her experience by serving in the leadership roles in the American Bar Association and other human resources, employee benefits and corporate compliance related organizations.

As a core part of her practice, Ms. Stamer continuously works with businesses and business leaders to manage human resources, design and administer executive compensation and employee benefit programs, and implement and defend internal controls and other risk management programs. When working with clients, Ms. Stamer combines a client-oriented approach with an extensive practical and technical knowledge of human resources, employee benefits, corporate compliance and other legal matters to assist clients to formulate and administer pragmatic operational and risk management strategies and effective internal controls taking into account the financial, operational, political, legal and other realities confronting the client.  For additional information about Ms. Stamer and her experience, see CynthiaStamer.com or contact Ms. Stamer via telephone at 972.419.7188 or via e-mail at [email protected]

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Cynthia Marcotte Stamer, is nationally and internationally recognized for her work assisting businesses, governments, and other entities to develop creative strategies for dealing with employee benefit and related human resources, insurance, health care and finance concerns. Ms. Stamer helps businesses design, administer and defend cost-effective employee benefit other human resources programs, policies and procedures to meet their budgetary and other business objectives.