July 1, 2009
Authored by: Robert Klingler
The Interim Final Rules regarding Executive Compensation for TARP recipients provide a number of corporate governance standards for Compensation Committees. While these standards currently only apply to financial institutions that have outstanding TARP investments, many of the standards are likely to be considered best practices for the compensation committees of all companies.
TARP recipients generally are required to have a compensation committee consisting solely of independent directors (with independence determined by reference to the federal securities laws). (Private TARP recipients who received a TARP investment of less than $25 million are not required to have a compensation committee, in which case the full Board of Directors is required to take the actions detailed below).
The Compensation Committee must:
- Discuss, evaluate, and review at least every six months, with a senior risk officer, the SEO compensation plans to ensure that such plans do not encourage the SEOs to take “unnecessary and excessive risks that threaten the value” of the Company. The compensation committee must identify the features in the SEO compensation plans that pose risks to the Company, including any features that would encourage the SEO to focus on short-term results over long-term value creation, and then must limit those risks.
- Discuss, evaluate, and review at least every six months the other employee compensation plans in light of the risks posed to the Company and how to limit such risks.
- Discuss, evaluate, and review at least every six months the employee compensation plans to ensure that these plans do not encourage the manipulation of reported earnings to enhance the compensation of any employee.
- At least once a year, provide a written narrative description of how the SEO compensation plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company, the risks posed by employee compensation plans and how these risks were limited, and how the Company has ensured that the employee compensation plans do not encourage manipulation of reported earnings.
- Within 120 days of the completion of any fiscal year during which the Company had a TARP investment, certify to the Treasury and the Company’s primary federal banking regulator the completion of the reviews required by (1), (2) and (3) above.
Within 120 days of the completion of any fiscal year during which the Company had a TARP investment, TARP recipients are also required to disclose a narrative description of: (i) whether the company, the compensation committee or the board of directors has engaged a compensation consultant; and (ii) all types of services, including non-compensation related services, the compensation consultant has provided to the Company during the past three years.