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.

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One Comment

  1. Virgil Bierschwale
    Posted Saturday, October 18, 2008 at 8:44 am | Permalink

    I find it interesting that you are discussing some of the articles of this act that you find troubling and I believe it is good that you are doing this.

    That said though, I want to bring your attention to the fact that it is our own short sightedness that has contributed to the necessity of this act.

    Since the mid to late 70’s, we have been slowly decreasing the funds that are necessary to run our country by sending jobs offshore which 1) dilutes our tax revenue necessary to continue running the country and 2) forces the necessity to increase taxes to compensate for this reduction in tax revenue and 3) lowers the average salary for our workers here in America.

    These actions are now starting to come home to haunt us by decreasing the confidence in our elected officials and corporate boards.

    This lack of confidence in the system comes about because people are worried that they themselves will lose their jobs and they are very well familiar with their friends and acquaintances stories about how they were unable to find comparably paying jobs to replace their income.

    All of these actions have made this bailout necessary and I too share your concerns, however I believe we can correct the situation without going further in debt by simply 1) bringing our jobs home, or 2) tax the companies sending jobs offshore the difference between what the job would pay here in America (market price) and what they are currently paying offshore.

    Either of these two acts will work to reduce the necessity to increase taxes, but simply bringing the jobs home will work to restore Americans confidence in Americas Future.


    Virgil Bierschwale