Treasury Releases Compensation Rules for TARP Firms

Last evening, the Treasury released new rules for compensation of top executives at the firms that received TARP bailout funds. The rules can be seen here.

Specifically, the rules limit compensation for senior executives and other highly paid employees at companies receiving TARP funds, including limits on bonus payments (to one-third of total compensation) and curtailment of Golden Parachutes. Further, the bonuses paid to senior executive officers and the next 20 most highly compensated employees will be subject to a “clawback” provision if the payment was based on materially inaccurate performance criteria.

Under the rules, the Treasury appointed Kenneth R. Feinberg as the Special Master for TARP Executive Compensation. Mr. Feinberg will review payments and compensation plans for the executives and the 100 most highly compensated employees of seven TARP recipients that have received exceptional assistance, AIG (AIG), Citigroup (C), Bank of America (BAC), Chrysler, General Motors, GMAC LLC, Chrysler and Chrysler Financial.

Additionally, the rules encourage firms to pay salaries in the form of stock that must be held for a long period of time. Also, the board of directors of each TARP recipient is required to put in place policies on luxury or excessive expenditures.

Treasury Secretary Geithner said the administration will be working with Congress in two areas 1) to pass the so-called “say on pay” legislation, which would give the SEC authority to require companies to give shareholders a non-binding vote on executive compensation packages, and 2) to propose legislation giving the SEC the power to ensure that compensation committees are more independent, similar to those in place for audit committees as part of the Sarbanes-Oxley Act.

Secretary Geithner also clarified that the Government will not be not capping pay or setting precise prescriptions for how companies should set compensation, and we totally agree that Government should not be involved in micromanagement of TARP recipients or other companies.

While these rules will apply only to companies which continue to be under TARP, the regulators need to make the review of compensation practices a part of the supervisory process so that the banks which recently escaped from TARP clutches do not revert to the system of executive compensation that rewarded excessive risk taking and was major cause for the current crisis.

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