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Treasury Requires CEOs of Banks in TARP to Certify Executive Comp Curbs

Only the banks’ compensation committees have been required to put their names on the line in asserting institutions’ compliance with curbs on senior executives’ severance pay and other incentives.

January 21, 2009
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In one of its final acts under Secretary Henry Paulson, the Treasury Department required the chief executives of banks getting aid under the $700 billion bailout to certify that they are complying with the executive compensation limits of the program.

Only the banks’ compensation committees have been required to put their names on the line in asserting institutions’ compliance with curbs on senior executives’ severance pay and other incentives.

“This pounds it home that CEOs are really on the hook for the accuracy of banks’ representations on executive pay,” said banking consultant Bert Ely of Alexandria, Virginia.

The CEOs will have 135 days after the end of their institutions’ fiscal years to certify that banks have complied with the standards set out in the October legislation, the Treasury said in a statement Friday, January 16.

The top executives also will have 120 days after their agreements with Treasury to certify that the compensation committee and senior risk officers have ensured that executives’ contracts don’t encourage them to take unnecessary financial risks.

Under the October legislation as it applies to senior executives, banks receiving bailout money:

• Can’t make “golden parachute” severance payments equal to at least triple the base pay of executives;

• Must subject any bonuses or incentives to “clawbacks” by the institution if payments are based on banks’ misleading financial statements;

• Can’t offer incentives that “encourage unnecessary and excessive risks that threaten the value of the financial institution”; and

• Must not deduct for tax purposes more than $500,000 in pay for each executive.

These limits apply to the CEO, the CFO and the next three mostly highly compensated executives in a bank.

Also on Friday, the Treasury wrote to the 20 banks that received the most capital from the bailout, asking for monthly reports on business and consumer loans in an attempt to encourage lending, Bloomberg News reported.

“I find this troubling because it ignores the lending that banks are doing and paves the way for credit allocation,” Ely said.

Paulson has been criticized by lawmakers of both parties for failing to require banks to use their bailout money to increase lending.

The Senate last week released the second half of the $700 billion bailout following a request by President George W. Bush at the request of then-President-elect Barack Obama.

Obama has signaled that he intends to impose stricter conditions on the recipients of rescue funds to ensure that they carry out the objectives of the legislation.

He has appointed Timothy Geithner, president of the Federal Reserve Bank of New York, as his Treasury secretary. His confirmation hearing before the Senate Finance Committee is scheduled for Wednesday, January 21.

The Treasury’s “interim final rule” on CEO certification is effective immediately, though the agency is inviting public comment for the next 30 days and said it will consider these comments in developing a final rule.

A survey of 200 companies by Mercer consultants found that many plan to award more shares to executives this year to counter depressed stock prices.

Other companies are planning to move away from stock options and reduce annual incentive payments for 2008 performance while considering discretionary awards, according to the study released January 14.

For a copy of the Treasury rule on CEO certification, go here. http://www.treas.gov/press/releases/reports/tarp%20_executive%20compensation%20ifr%20jan%202009.pdf 

Filed by Neil Roland of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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