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Recent Developments and Trends in Executive Pay for Financial Services Companies Marjorie M. Glover December 17, 2009.

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Presentation on theme: "Recent Developments and Trends in Executive Pay for Financial Services Companies Marjorie M. Glover December 17, 2009."— Presentation transcript:

1 Recent Developments and Trends in Executive Pay for Financial Services Companies Marjorie M. Glover December 17, 2009

2 2 Special Note This Powerpoint presentation was presented at the ThompsonReuters conference on Recent Developments and Tends in Executive Compensation for Financial Services Companies on December 17, 2009 Provisions related to the Special Master for TARP Executive Compensation and related Advisory Opinions are set forth in a separate Powerpoint presentation prepared by co-panelist James Sillery of Buck Consultants

3 3 TARP Timeline In October 2008, the Treasury Department established the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008 (EESA) EESA was enacted to restore liquidity and stability to the financial institutions Section 111 of EESA set new appropriate standards for executive pay and corporate governance including: incentive pay limits; clawbacks; and golden parachute prohibitions

4 4 TARP Timeline EESA Guidance October 2008 Interim Final Rule set original standards for Capital Purchase Program (CPP) recipients Treasury Notice 2008-PSSFI set standards for systematically significant failing institutions including more rigid golden parachute restrictions Treasury Notice 2008-TAAP prohibited any financial institution selling more than $300M in troubled assets through an auction program (Auction Sale TARP Recipients) from entering into new Senior Executive Officer (SEO) agreements with a golden parachute during length of program IRS Notice required Auction Sale TARP Recipients to forego any deduction in excess of the $500,000 limit on executive pay under the new IRC Section 162(m)(5) and under limit on golden parachute deductions under the new IRC 280G(e)

5 5 TARP Timeline On February 4, 2009, Treasury issued new guidance on executive pay and corporate governance standards under EESA Reporting, recordkeeping and disclosure Additional restrictions on recipients of exceptional assistance including: $500,000 pay cap (other than restricted stock and long-term incentive arrangements) Restricted stock vesting requirements Expanded clawbacks Expanded golden parachute prohibitions Establishment of luxury expenditures policies Additional restrictions applied only to future grants of TARP funds

6 6 TARP Timeline On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted ARRA significantly amended EESA provisions on executive pay and corporate governance Unlike the earlier February 2009 Treasury guidance, ARRA applies to financial institutions that already received TARP funds

7 7 TARP Timeline On June 10, 2009 Treasury announced the publication of an Interim Final Rule (IFR) under EESA as amended by ARRA IFR generally supersedes and consolidates all prior guidance IFR became effective June 15, 2009 Treasury issued a statement regarding legislative proposals for executive pay for public companies Treasury established the Office of Special Master for TARP Executive Compensation The SEC announced it would propose expanded proxy disclosure requirements that will now take effect for the 2010 proxy season

8 8 TARP Timeline In June 2009 Treasury also issued Q&As on the IFR (that have been subsequently updated) In July 2009 The SEC issued proposed amendments to proxy rules to address say on pay votes for TARP recipients

9 9 TARP Timeline On October 22, 2009 Federal Reserve and Treasury issued statements on executive pay and corporate governance Special Master issued first round of Advisory Opinions On December 7, 2009 Treasury issued technical corrections to the IFR On December 11, 2009 Treasury issued limited relief from IRC Section 409A for certain TARP recipient and their executives Special Master issued second round of Advisory Opinions

10 10 TARP Executive Pay and Corporate Governance Standards Governing Law - Section 111 of EESA as amended by ARRA and the IFR TARP Period – Any period in which TARP recipient owes money to the Federal government under TARP Three Categories of Standards Exceptional Assistance – large financial institution receiving funds over and above the Capital Purchase Program amount CPP Recipients – Recipients that hold obligations under the Capital Purchase Program that provides direct capital infusion in financial institutions in exchange for senior preferred shares Other Recipients – Recipients in other TARP programs (small business) that have no repayment or repurchase obligation SEO – PEO, PFO and three most senior executives as determined under prior fiscal years SEC filings Most Highly Paid Employees – determined based on prior fiscal year compensation and SEC filings

11 11 TARP Executive Pay and Corporate Governance Standards Executive Pay General Pay Limits Bonus, Retention and Incentive Pay Limits Clawbacks Golden Parachute Prohibitions Tax Gross-Up Prohibitions Corporate Governance Independent Compensation Committee Perquisite Disclosure Compensation Consultant Disclosure Say on Pay Vote PEO and PFO Certifications

12 12 TARP Executive Pay Standards General Pay Limits IRC Section 162(m)(5) Deduction Limit – Validates agreements of TARP recipients to forego deduction of pay in excess of $500,000 deduction limit Excessive Risk Pay Limits – Prohibits incentives for SEOs to take unnecessary and excessive risks threatening TARP recipients value Manipulative Pay Plan Limits – Prohibits compensation plans that would encourage manipulation of reported earnings to enhance compensation of employees

13 13 TARP Executive Pay Standards Bonus, Retention and Incentive Pay Limits Prohibits TARP recipients from paying or accruing any bonus, retention or incentive award to certain highly-paid employees or SEOs Limits depend on amount of TARP assistance received Exceptions - Long-term restricted stock and restricted stock units Bonuses paid under certain grandfathered employment contracts

14 14 TARP Executive Pay Standards Bonuses Amounts Not Treated As Bonuses Amounts Treated as Bonuses Contributions and distributions from tax- qualified plans Employer contributions and benefit increases to non-qualified plans Benefits under broad-based plans and fringe benefits Compensation for certain transactions (IPO or sale or acquisition) Bona fide routine expense reimbursements Loan forgiveness Certain commissions (pre- 2/17/09 plan, rate must be established, reasonable and applied consistently) Commissions (other than permitted commissions)

15 15 TARP Executive Pay Standards Limit on Bonuses, Retention and Incentive Pay Amount of TARP Assistance Covered Executives Less than $25 millionMost highly-paid employee $25 million to less than $250 million Five most highly-paid employees $250 million to less than $500 million SEOs and next 10 most highly- paid employees $500 million or moreSEOs and next 20 most highly- paid employees

16 16 TARP Executive Pay Standards Exceptions: Long-Term Restricted Stock and RSUs Prohibition does not apply to long-term restricted stock and RSUs as long as: the covered executive does not fully vest in the restricted stock or RSU during the TARP period; the value of the restricted stock or RSU does not exceed one-third of the covered executives annual compensation for the current fiscal year; and the TARP recipient complies with such other restrictions as the Treasury may impose

17 17 TARP Executive Pay Standards Exceptions: Grandfathered Employment Contracts Prohibition does not apply to bonuses under written employment contract in effect as of February 11, 2009 and determined by the Treasury to be valid Exception does not apply if contract is subsequently amended to increase the amount payable, accelerate vesting or otherwise materially enhance the benefits available under the contract (other than amendments to reduce bonus amounts, add vesting criteria or add holding periods)

18 18 TARP Executive Pay Standards Clawbacks TARP recipients must recover or clawback bonus, retention and incentive compensation for the SEOs and the next 20 most highly-paid employees if compensation was based on materially inaccurate financial statements (for example, earnings, revenue, gains or other criteria) or other materially inaccurate performance metric criteria Facts and circumstances test Recovery is not necessary if it is deemed unreasonable (generally if cost of recovery exceeds benefit of recovery)

19 19 TARP Executive Pay Standards Golden Parachute Prohibitions Prohibits payment of golden parachute payments to the SEOs and any of the next 5 most highly-paid employees For departure for any reason, except for payment for services performed or benefits accrued Single trigger payments upon change of control also prohibited

20 20 TARP Executive Pay Standards Tax Gross-Ups Prohibited Prohibits any tax gross-ups to any of the SEOs and next 20 most highly-paid employees during the TARP period Includes right to tax gross-up at a future date, for example a date after the TARP period ends

21 21 TARP Executive Pay Standards Luxury Expenditures Board must establish a policy on luxury or excessive expenditures, including: entertainment or events; office and facility renovations; company-owned aircraft; and other transportation and similar activities or events Within 90 days after closing date of TARP agreement or within 90 days after June 15, 2009, if later, board must: adopt excessive or luxury expenditures policy; provide policy to Treasury and primary regulatory agency; and post policy on company website

22 22 TARP Corporate Governance Standards Compensation Committee Governance TARP recipient must establish independent compensation committee within 90 days after closing date of TARP agreement or 90 days after June 15, 2009, if later Independent compensation committee must meet at least semi-annually to discuss, evaluate and review with TARP recipients senior risk officer SEO compensation plans to make sure they do not take unnecessary and excessive risks that threaten value of TARP recipient or earnings manipulation Report at least once per fiscal year on how plans comply with new standards Certify completion of reviews

23 23 TARP Corporate Governance Standards Perquisites Disclosure TARP recipient must disclose annually during TARP period any perquisite with a total value exceeding $25,000 during the fiscal year for each SEO and the most highly paid employees (as described in chart on page 14) Must include narrative of amount and nature, recipient and justification for offering perquisite Disclosure due within 120 days after completion of fiscal year during the TARP period Must disclose to Treasury and primary regulatory agency

24 24 TARP Corporate Governance Standards Compensation Consultant Disclosure TARP recipient must disclose annually whether TARP recipient or its board or compensation committee has engaged outside compensation consultant Must include narrative of all types of services provided (including non-compensation related services) during last three years, including benchmarking or comparisons Disclosure due within 120 days after completion of any fiscal year during the TARP period Must disclose to Treasury and primary regulatory agency

25 25 TARP Corporate Governance Standards Say on Pay TARP recipients must submit to shareholders for a non-binding advisory say on pay vote on executive pay SEC issued guidance on annual say on pay requirements for TARP recipients in July 2009

26 26 TARP Corporate Governance Standards PEO and PFO Certifications The principal executive officer and principal financial officer must certify compliance with the requirements noted above For public companies, certification must be made to the SEC For private companies, certification must be made to Treasury Treasury provides model certifications in IFR Separate models apply to first year certifications and second year certifications

27 27 TARP Corporate Governance Standards TARP Fund Repayment TARP recipients may repay TARP funds without replacing the repaid amount with other funds and without a waiting period If the amounts are repaid, the restrictions on executive compensation described above generally cease to apply

28 28 October 2009 Federal Reserve Guidance October 22, 2009, Federal Reserve announced two separate initiatives to provide supervisory review of bonus plans for all banking organizations supervised by Federal Reserve: 28 large complex banking organizations (LCBOs) Regional, community and other banking organizations After conclusion of 2010, Federal Reserve will prepare report on trends and developments for bank executive pay plans October 27, 2009, Federal Reserve Proposed Guidance on Sound Incentive Compensation Policies was published in Federal Register - Three principles: Provide employees incentives that do not encourage excessive risk taking Be compatible with effective controls and risk management Be supported by strong corporate governance including active and effective board oversight

29 29 Notice Issued December 11, 2009 Provides relief under IRC Section 409A (409A) to TARP recipients and their executives who comply with a Special Master Advisory Opinion that requires either: a change in the time or form of pay; or conditions payment upon a TARP-related condition such as the prior repayment of some or all financial assistance will not violate 409A Applies only to Advisory Opinions issued after September 30, 2009 Treasury and IRS intend to amend 409A regulations to incorporate guidance

30 30 Notice Requirements for 409A Relief Advisory Opinion must be addressed to TARP recipient and must specifically address compensation arrangement between TARP recipient and executive TARP recipient must fully disclose to Special Master identity of any similarly situated executives and, to extent requested by Special Master, include those executives in the request for the Advisory Opinion For this purpose, SEO and next 20 executives will not be treated as similarly situated to next 26 through 100 top executives Advisory Opinion must explicitly set forth a (1) revised time and form of payment that would otherwise have complied with 409A, (2) condition or payment that is directly related to the financial assistance received by the TARP recipient to repay the TARP assistance or (3) combination of both (1) and (2)

31 31 Notice Requirements for 409A Relief Advisory Opinion must not permit the TARP recipient or executive to elect another time or form of payment other than in a manner compliant with 409A (the decision to repay some or all of the TARP assistance will not be treated as an election as to the time and form of payment) The TARP recipient and executive must enter into a written agreement containing the revised time and form of payment and any applicable conditions on payment no later than end of executives tax year in which the Advisory Opinion is issued or the 15 th day of the third month following the date the Advisory Opinion is issued, if later TARP recipient and executive comply with the Advisory Opinion in all material respects

32 32 Notice Relief from 409A Failure to pay on the originally designated payment date will not be treated as an impermissible initial deferral election or subsequent deferral election under 409A If Advisory Opinion requires a change in payment of an amount that otherwise qualifies as a short-term deferral under 409A to a time or form that would cause such amount to be treated as deferred compensation subject to 409A, the amount will be treated as deferred compensation under 409A once the change to the time and form of payment has been made Exception: If the Advisory Opinion requires only that the payment of such amount be delayed until specified TARP-related conditions are met, and does not otherwise prescribe changes in the time and form of payment, such condition will not cause the amount to fail to qualify as a short-term deferral as long as the amount is paid at the earliest date at which the executive anticipates or reasonably anticipates that the payment would be permissible under the Advisory Opinion

33 33 Notice Relief from 409A Early payments (payments before the original payment date) pursuant to the Advisory Opinion or EESA will be treated as permissible accelerations This includes early payments upon repayment of TARP assistance Once the TARP recipient and executive have agreed to the revised time and form of payment pursuant to the Advisory Opinion in writing, the revised time and form of payment is treated as the time and form of payment for purposes of determining future compliance with 409A


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