Feds Act On Executive Comp

Policymakers should look at whether golden parachutes and supplemental retirement packages really improve executives’ performance, and whether they reward top executives even if shareholders lose value, Geithner said.

TARP Compensation Regulations

The interim final rule governing compensation of top executives and other highly compensated employees at TARP recipients is long and includes dozens of references to deferred compensation plans.

At affected companies, the regulations curtail the payment of golden parachutes, limit bonus payments, and provide an opportunity for the government to “claw back” bonuses paid “based on materially inaccurate performance criteria.”

The interim regulations apply different rules to ordinary compensation and incentive compensation, and they include many discussions about when commission income payments and deferred compensation arrangements should and should not be include in compensation assessments.

TARP recipients can treat the commissions paid to life insurance sales representatives as ordinary commission compensation, rather than as incentive compensation, officials write.

In addition, “Section 30.1 (Q-1) of the interim final rule excludes from the definition of golden parachute payment qualified retirement plans and similar foreign retirement plans, as well as payments due to an employee’s death or disability and severance payments required by state statute or foreign law,” officials write.

The interim rule definition of “deferred compensation plan” includes “any plan, contract, agreement, or other arrangement under which an employee voluntarily elects to defer all or a portion of the reasonable compensation, wages, or fees paid for services rendered which otherwise would have been paid to the employee at the time the services were rendered (including a plan that provides for the crediting of a reasonable investment return on such elective deferrals).”

The definition also includes “a nonqualified deferred compensation or supplemental retirement plan, other than an elective deferral plan established by a TARP recipient, primarily for the purpose of providing benefits for a select group of directors, management, or highly compensated employees” or “primarily for the purpose for providing supplemental retirement benefits or other deferred compensation for a select group of directors, management or highly compensated employees (excluding severance payments).”

In one example, an employee defers 20% of each salary payment into a nonqualified deferred compensation plan. At each salary payment date, the employee will get an $8,000 payment in cash, be transferred a number of shares of common stock of the TARP recipient company and a $3,000 contribution to an account under a nonqualified deferred compensation plan.

In that case, “the arrangement is for the payment of salary, and is not an incentive plan,” officials conclude.

Another section of the interim rule discusses when, for purposes of imposing limits on retention awards, a defined compensation plan should be treated as a retention award.

“Whether a benefit under a deferred compensation plan that is subject to a service vesting period is a retention award depends on all the facts and circumstances,” according to the text of the interim final rule. “However, to the extent an employee continues to accrue, or becomes eligible to accrue, a benefit under a plan the benefits under which have not been materially enhanced for a significant period of time prior to the employee becoming [a senior executive officer] or most highly compensated employee (including through expansion of the eligibility for such plan), the benefits accrued generally will not be a retention award. However, to the extent the plan is amended to materially enhance the benefits provided under the plan or to make such employee eligible to participate in such plan, and such benefits are subject to a requirement of a continued period of service, such an amendment generally will be a retention award.”