§5221 Executive Compensation and Corporate Governance

Summary

Companies that got TARP money must follow strict pay and board rules until their TARP obligation is paid back. Key defined words in one line each: "senior executive officer" means one of the top 5 highest-paid executives whose pay is reported; "golden parachute payment" means payments when an executive leaves (except pay for work done or benefits earned); "TARP recipient" means any entity that got or will get TARP help; "Commission" means the Securities and Exchange Commission; the time the obligation counts does not include periods when the Government only holds warrants. Those companies must limit pay that encourages risky behavior. They must have a clawback for any bonus, retention award, or incentive paid to senior executives and the next 20 highest-paid employees if the numbers they were based on are later found to be materially wrong. They may not make golden parachute payments to senior executives or the next 5 highest-paid employees while the obligation is outstanding. They generally may not pay or accrue bonuses, retention awards, or incentive pay during that time, but they can grant long-term restricted stock that does not fully vest during the period, is no more than one-third of the employee’s annual pay, and meets other Secretary conditions. How many employees are covered by the pay ban depends on TARP size: less than $25,000,000 covers only the top-paid employee; $25,000,000–less than $250,000,000 covers at least 5; $250,000,000–less than $500,000,000 covers senior executives plus at least the next 10; $500,000,000 or more covers senior executives plus at least the next 20. Contracts dated on or before February 11, 2009 may require payments as validated by the Secretary. Companies must forbid pay plans that encourage fake earnings and must set up a Board Compensation Committee of independent directors that meets at least twice a year (for very small non-registered recipients with $25,000,000 or less in aid, the full board can do this). Boards must have a policy against luxury or excessive spending (examples include big events, fancy office renovations, private aviation). Shareholders must get an annual, separate vote on executive pay as disclosed; that vote is nonbinding. The CEO and CFO must certify compliance (public companies to the SEC; private recipients to the Secretary). The Secretary will review past bonuses paid before February 17, 2009 and may seek reimbursements if they conflict with these rules, will allow recipients to repay TARP help at any time and may sell warrants at market price, and must write regulations to carry out these rules. The SEC had to issue final rules under the shareholder vote requirement not later than one year after February 17, 2009.