Executive Compensation Practices Tackled by Treasury, Fed

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Oct. 23, 2009.

The Treasury Department and the Federal Reserve Board made dual announcements October 22 concerning efforts to curb executive compensation in the financial industry, marking an unprecedented move by the Obama administration to tackle what it sees as the problem of unchecked risk-taking promoted by excessive pay.

Special Master for TARP Executive Compensation Kenneth Feinberg, who has reviewed compensation at the seven firms that received exceptional TARP assistance, announced that average cash compensation for the 25 highest earners at each company would decline more than 90 percent. Approved cash salaries would be limited to $500,000 for more than 90 percent of relevant employees. As a result, average compensation would decline by more than 50 percent, which is less than half of 2008 levels, although exceptions could be made where necessary to retain talent and protect taxpayer interests.

The seven firms Feinberg reviewed are AIG, Citigroup, Bank of America, Chrysler, General Motors, GMAC and Chrysler Financial.

Other provisions outlined by Feinberg would:

• reject cash bonuses based on short-term performance in favor of company stock held over the long term;
• restructure existing cash “guarantees” into stock held for the long term;
• require that the majority of salaries be paid in stock held for the long term;
• require that stock received as salary be sold only in one-third installments starting in 2011, unless TARP funds are repaid earlier.

In addition, incentive compensation would have to be paid in the form of long-term restricted stock, which would be contingent on company performance and TARP repayment. New restrictions would also be placed on practices such as golden parachutes and supplemental executive retirement plans.

Meanwhile, the Fed released proposals aimed at appropriately aligning compensation packages with longer-term performance, so that they do not create unnecessary risk for the firm or financial system.

One proposal would apply to 28 large, complex banking organizations, and would determine if corporate policies and practices were consistent with risk-appropriate compensation principles established by the Fed.

The Fed is also proposing that supervisors review compensation practices at regional, community and other banking organizations as part of the regular, risk-focused examination process.

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