White House Cracks Down on Wall Street Compensation

Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.”  But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.

The Treasury executive compensation reform guidelines fall into three categories covering:

  • all TARP recipients;
  • participants in a “generally available capital access program,” such as the Capital Purchase Program; and
  • institutions that receive “exceptional assistance,” such as Citigroup, Bank of America, and AIG. 

Their new policy also includes a regulatory reform proposal to align compensation strategies with “proper risk management and long-term value and growth.”  In brief, the president directs the Secretary of the Treasury and the Chairman of the Securities and Exchange Commission to work together on the following:

  • Require compensation committees of all public financial institutions to review and disclose senior executives’ compensation arrangements and explain how the arrangements are consistent with promoting sound risk management and long-term value creation for their companies and shareholders.
  • Consider whether financial institutions’ top executives should hold stock for several years after it is awarded in order to encourage more long-term focus on institutions’ economic interests.
  • Encourage “Say on Pay” shareholder resolutions on executive compensation so that shareholders can weigh in on the levels and structure of compensation incentives to help promote risk management and long-term value creation.
  • Host a White House-Treasury conference on long-term executive pay reform that includes shareholder advocates, public pension and institutional investor leaders, policy-makers, executives, academics, and other stakeholders to gather testimony, comments, and white papers on model executive pay initiatives in order to work toward developing best practices and guidelines on executive compensation arrangements for financial institutions.

Below is the outline of the new executive compensation guidelines, which will not be applied retroactively.

All Companies Receiving TARP Assistance

  • Chief Executive Officers of all companies that have received or do receive any TARP assistance must annually certify company compliance with statutory, Treasury, and contractual executive compensation restrictions, and the companies’ compensation committees must also explain “how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.”
  • Clawback—Prior recipients’ top five senior executives were subject to clawback provisions. Going forward, recipients “must have in place provisions to claw back bonuses and incentive compensation from the next twenty senior executives if they are found to have knowingly engaged in providing inaccurate information relating to financial statement or performance metrics used to calculate their own incentive pay.”
  • Board of Directors Policy re. Luxury Expenditures—Boards of Directors 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. Policies must be posted on company web sites, and excessive or luxury expenditures must have certification from the CEO.

Companies Receiving Exceptional Financial Recovery Assistance

  • Pay limits—Senior executives are limited to $500,000 in total compensation except for restricted stock awards, which could only vest after the government has been repaid with interest.
  • Say on Pay—Executive pay compensation, structure, and strategy, especially how pay is tied to sound risk management, must be fully disclosed and subject to a “say on pay” shareholder resolution.
  • Ban on Golden Parachutes—Expand the existing ban on the top five senior executives to the top ten senior executives. Upon severance from employment, the top ten senior executives may not receive any golden parachute payment, and the next 25 senior executives may not receive a golden parachute payment greater than one year’s compensation.

Companies Participating in Generally Available Capital Access Program

  • Pay Limits—Senior executives are limited to $500,000 in total annual compensation plus restricted stock unless it is waived by a shareholder vote and there is full public disclosure. Future participants must review and certify that employee compensation arrangements do not encourage excessive and unnecessary risk taking.
  • Golden Parachute Ban—Upon severance from employment, the top five senior executives will not be allowed a golden parachute payment greater than one year’s compensation, which is a reduction from the current three-years’ compensation provision under the Capital Purchase Program.
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