Don Norman and Andy Strimaitis, partners in Chicago-based law firm Barack Ferrazzano who specialize in executive compensation matters for financial institutions, will be speaking at Bank Director’s compensation conference November 8-9 in Chicago. Here, they discuss the legacy issues from the TARP compensation limits that may remain after repayment of TARP funds.
When a banking organization participating in Treasury’s Troubled Asset Relief Program, better known as TARP, considers repayment, it is commonplace to presume that the organization will be free from the shackles of various compensation limitations, governance rules and reporting requirements that applied during the TARP period. Unfortunately, upon closer examination, it becomes apparent that several areas will require ongoing vigilance to ensure full compliance with the TARP rules.
Generally, following the repayment date, the organization and its employees will no longer be subject to the TARP rules with respect to future compensation decisions (i.e., with respect to time periods following the repayment date). There are, however, a few important exceptions and distinctions to note with respect to this general rule.
Bonus Restriction. Even after the repayment date, an organization will continue to be prohibited from paying to, or accruing on behalf of, any employee who was subject to the bonus prohibition any bonus, retention award or incentive compensation with respect to the time period during which that employee was subject to the TARP bonus restriction. This is supported by an interpretive letter from the Secretary of the Treasury Timothy F. Geithner to Elizabeth Warrren, then-chairman of the Congressional Oversight Panel, dated February 16, 2010, concerning certain aspects of the TARP-related executive compensation restrictions.
For example, assume that for 2011, Joe Smith is the highest paid employee of XYZ, Inc. (based on 2010 compensation). Further, assume that XYZ, Inc. repays 100 percent of its TARP funds on June 30, 2011. In determining annual bonuses for 2011, XYZ, Inc. could pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from July 1, 2011 through December 31, 2011. However, even though its TARP funds have been repaid, it could not pay to, or accrue on behalf of, Joe Smith a bonus with respect to the performance period from January 1, 2011 through June 30, 2011.
The same treatment also applies to equity awards that were granted during the TARP period and after February 17, 2009, to employees who became subject to the bonus prohibition during a year following the year of grant (these awards would not be qualified “long term restricted stock” awards, as they would have been granted to employees not subject to the bonus prohibition). In this case, while the employee was subject to the bonus prohibition, the employee could not continue to vest in the equity award. Once the employee is no longer subject to the bonus prohibition (because TARP was repaid, or the employee was no longer one of the highly compensated employees subject to the prohibition), the employee cannot “catch up” the vesting that was tolled during the bonus prohibition period. Thus, an equity award that may have had a five-year vesting period, will now have a total vesting period equal to five years plus the period the employee was subject to the bonus prohibition.
Severance Restriction. Pursuant to the TARP rules, a “golden parachute” payment (i.e., severance) is considered to be made at the time of termination rather than at the time of payment. As such, after the TARP repayment date, an organization cannot revisit a termination that occurred during the TARP period and make a severance payment or provide other post-termination benefits to an employee who left the company while subject to the TARP severance restriction.
Deduction Limitation. A TARP participant is also prohibited from deducting, with respect to its “senior executive officers,” more than $500,000 of compensation expense per year during the TARP period. Under the TARP rules, the deduction limitation applies to currently available compensation as well as deferred compensation earned during the TARP period. As such, an organization participating in TARP is obligated to continue to track, post-TARP repayment, the deduction limitation with respect to compensation earned during the TARP period even if those amounts are paid after the repayment date.
Reporting Requirements. After the end of the year that includes the TARP repayment, the organization will be required to submit its annual PEO/PFO and compensation committee certifications, risk assessment analysis and narrative and other disclosures with respect to the period preceding the repayment date. For public companies, this will include attaching the PEO/PFO certifications to the annual Form 10-K and also including the compensation committee certification and narrative summary in the annual proxy statement. For public and private organizations, all required disclosures will also have to be submitted to the Treasury electronically, and in some cases, to the organization’s primary federal regulator.