While the economic stimulus package was signed into law on Tuesday, it left unanswered many questions about how one of its most talked-about principles — limits on compensation for executives of firms that take federal bailout funds — will be applied in practice.
Financial institutions that participated in the first round of the government’s Troubled Assets Recovery Program, and those that hope to get in on round two, are not yet clear on how and when to proceed with changes to their compensation programs, if necessary. They are waiting for the Treasury Department to issue regulations and interpretations amplifying the broad principles set forth in the stimulus law.
But they are not waiting patiently. The American Bankers Association sent a letter to Treasury Secretary Timothy Geithner yesterday, complaining about hardships for its members while they await the department’s guidance.
“Because the Act ties compliance with the executive compensation provisions directly to standards that have not yet been established and issued by the [Treasury] Secretary, we believe it is clear that these provisions are not effective until these standards are established,” the bankers group wrote, adding, “Our industry is badly in need of immediate clarification.”
The ABA claimed that some banks are unable to close transactions, including at least one acquisition, because of uncertainty over the effective date of the law.
Another problem, according to the ABA, is that some institutions may not be able to file their 2009 proxy statements as scheduled because they do not know how the act may impact the required compensation disclosures. Others are questioning whether they may have to restate their 2008 financial results due to the potential retroactive impact the compensation restrictions could have on the income statement, the letter said.
Bashed for the Past?
There may be “retroactive impact” because Congress gave Treasury the right to look back at any compensation paid to senior executive officers, and the next 20 most highly paid employees, of entities that received TARP assistance before the stimulus bill became law. If the department determines that payouts were “contrary to the public interest,” it will initiate a negotiation for “appropriate reimbursements.”
In fact, the wording of the provision does not necessarily limit the review to 2008 bonuses. It ambiguously leaves open the door to reevaluating prior compensation as well. “Technically, they could be going back 20 years,” said Steve Barth, a partner with the law firm Foley & Lardner, “though how that would be enforceable, no one knows.”
Additional uncertainty for TARP beneficiaries lies in other still-to-be-clarified elements of the compensation limitations, which modify or replace some of those that were included in the original TARP legislation enacted last fall.
President Obama had ballyhooed a $500,000 limit on all compensation for executives of firms that took bailout money. But that provision was replaced at nearly the last minute, in an amendment pushed through by Sen. Christopher Dodd last weekend, with a new one that says incentive compensation can be no more than one-third of total pay (and must be in the form of restricted stock that does not fully vest until the firm repays its loan to the government).