Executive Compensation and the Emergency Stabilization Act of 2008

The President recently signed into law the Emergency Economic Stabilization Act of 2008 (the “Act”), which aims to restore liquidity and stability to the financial system, to protect the value of Americans’ homes and savings and to promote economic growth. The Act includes a number of provisions relating to executive compensation, which have important implications for financial institutions selling troubled assets under the Act.

The Act subjects financial institutions that sell assets to the Treasury to restrictions on executive compensation based on the nature of the sale. In a recent Memorandum, my colleagues and I identify several items that demand immediate attention from institutions that may become subject to these restrictions:

• Severance Agreements. Financial institutions that have previously determined to enter into severance agreements with senior executive officers or individuals who may become senior executive officers should execute these agreements prior to engaging in sales of troubled assets under the Act, although it is unclear whether the prohibition on new golden parachute agreements will apply retroactively to cover arrangements entered into after enactment of the Act but prior to such sales.

• Golden Parachute Excise Tax Provisions. Financial institutions should understand whether existing golden parachute excise tax gross-ups apply to payments subject to the amendments to Section 280G and whether they wish to provide this protection in the non-change-of-control context. To the extent that companies do provide excise tax protection under circumstances covered by the amendments to Section 280G, they should understand the potential costs of any lost deductions and gross-ups that may apply as a result of the termination of a covered executive’s employment, and reflect the gross-up cost in annual proxy statement disclosures. Similarly, companies that impose cut backs should determine whether to impose these limitations in the non-change-of-control context.

• Identifying Senior Executive Officers/Covered Executives. Any financial institution (public or private) engaging in asset sales that trigger application of the Act’s executive compensation and related tax provisions will need to identify the “senior executive officers” and “covered executives” under the Act and should implement systems to track all includible compensation for executives that may fall into these categories.

• Expand Internal Controls. Financial institutions subject to the compensation and tax provisions of the Act will need to implement controls to ensure that they do not take improper deductions or lose permissible deductions due to the application of the amended rules.

• Reconsidering Compensation Elements and Disclosure in Light of Amended Section 162(m). Companies subject to the amendments to Section 162(m) should monitor any Treasury guidance regarding the types of compensation subject to the $500,000 limit. Once regulations are issued, financial institutions that are subject to the amendments to Section 162(m) should consider whether it makes sense to redesign compensation arrangements in light of the elimination of the exception for performance-based compensation during periods in which the Act is in effect, taking into account the fact that Section 162(m) as in effect prior to the Act will remain in effect after the amendments under the Act cease to apply. Finally, companies may need to modify Section 162(m) disclosure in their annual proxy statements to reflect the ability to take deductions in light of the amendments to Section 162(m) under the Act.

The full Memorandum is available here.