Congress’ proposed bailout bill contains several provisions affecting executive compensation. Thankfully, these provisions only apply to firms that sell assets to the Department of Treasury. Moreover, the limits only apply while the Department of Treasury holds a significant equity or debt position in a firm.
The bill applies different standards to firms directly acquired by the Department of Treasury and those sold at auction. For firms acquired directly by the Department of Treasury, the Secretary of Treasury shall establish appropriate executive compensation standards that:
- Place limits that exclude incentives for executive officers to take unnecessary and excessive risks that threaten the value of the institution.
- Permit “claw-backs” – i.e., the recovery of any bonus or incentive compensation paid to a “senior executive officer” based on materially inaccurate statements of earnings, gains, or other criteria later proven inaccurate.
- Prevent any golden parachute payment to any “senior executive officer.”
For companies that sell more than $300 million in assets to the Department of Treasury at auction, the Secretary of Treasury shall make rules that: prohibit 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.
Notably, the Secretary’s standards for “claw-backs” and golden parachute payments only apply to “senior executive officers.” The bill defines a “senior executive officer” as one of the top five executives in a public company whose compensation must be disclosed under Securities Exchange Act of 1934 and non-public company counterparts.
However, company executives, boards of directors, and compensation committees should not rest easy in thinking this is the end of the story. In today’s Main Street versus Wall Street environment, Congress is likely to be under increased pressure to enact even more significant executive compensation guidelines. In fact, there have been proposals to expand the scope of regulation of executive compensation to cover companies other than merely those supported by the legislation. These proposals can include limiting tax deductions for excessive compensation, requiring shareholder review, and/or approval of compensation arrangements, and further limits on severance benefits.
In anticipation of future legislation and/or regulation, companies should now review their compensation practices and procedures for executives. In particular, boards of directors and compensation committees should examine closely existing arrangements for incentive forms of compensation, caps on total compensation, and levels of severance and change of control benefits.