Treasury Expands TARP Compensation Rules to All Bank Employees, Puts Focus on Risk Management

Jun 28, 2009 | See More in: Bailout & Reform

TARP recipients beware: Treasury has severely limited incentive
compensation plans for not just your senior executive officers, "but
for everyone in the bank," notes Henry Oehmann, director of national
executive compensation services for Grant Thornton in Raleigh, N.C.

Under the TARP Standards for Compensation and Corporate Governance -
Treasury's interim final compensation rules that went into effect this
month - each bank's risk officer must meet with the compensation
committee at least every six months to "identify and limit" any
features of your senior executives' compensation plans as well any
employee's compensation plan that would "encourage behavior focused on
short-term results and not on long-term value creation."

Most banks already have compensation committees that review executive
pay. But for smaller community banks, the increased focus on risk
management and the restrictions on incentive compensation might pose
problems, Oehmann says.  Banks that don't have dedicated chief risk
officers will probably have to get outside assistance to comply with
the Treasury rules, he says.

The rules require the bank's compensation committee to limit features
in pay plans to ensure that senior executive officers (SEO) and others
"are not encouraged to take risks that are unnecessary or excessive and
that the TARP recipient is not unnecessarily exposed to risks."

Oehmann says that compensation committees "should be aware of any kind
of incentive agreements," whether they are for an SEO or for a teller
being paid extra to add new depositors.  "It's very clear we can't do
anything in bonuses," he notes. The rules basically strip down
compensation of senior executive employees to two components: base
salary and some restricted stock. Treasury includes stock options in
its definition of incentive compensation plans, "regardless of whether
those plans are subject to performance-based vesting."  The rule also
prohibits tax gross-up payments.

The new rule, which went into effect on June 15^th but
still can be amended, allows Treasury to withdraw bonuses, golden
parachutes or incentive payments that are in violation of the
compensation restrictions. There is no limit to the clawback recovery
period, and it "covers not only material inaccuracies relating to
financial reporting but also material inaccuracies relating to other
performance metrics used to calculate bonus payments," the rule states.

Review and modify your employment agreements to makes sure they are in
compliance with the TARP interim final rule, suggests attorney Stanley
D. Baum of Eaton & Van Winkle LLP in New York, author of the Erisa Lawyer Blog.
 Just because Treasury bans bonuses doesn't mean your bank will be
saved from a breach of contract claim from an employee who has been
promised one, he notes. "Companies have to get their benefits and
employment agreements and look at them."

Baum suggests that financial institutions create a "high-level
committee" reporting to the board that has overall responsibility for
"making people aware of what they have to do." Such a committee would
make sure the compensation committee is truly independent; ensure that
the board, CEO and CFO are aware of their duties under TARP; and help
write the policies and procedures Treasury requires.

The rule, for instance, requires the compensation committee to provide
an annual narrative description of how it limited features in SEO and
employee compensation plans encouraging unnecessary and excessive
risk-taking, as well as how it limited any employee compensation plan
"that could encourage the manipulation of earnings of the TARP
recipient to enhance the compensation of an employee."

The rules also require the boards of TARP recipients to adopt written
policies for "excessive or luxury expenditures" that identify what
expenditures are prohibited and why. The policies must be posted on the
company's web site.

Banks must also disclose to Treasury and its primary federal regulator
whether it has "engaged a compensation consultant and all types of
services the compensation consultant or any of its affiliates has
provided to the TARP recipient, the board, or the compensation
committee during

more...http://www.fincriadvisor.com/2009-06-29/TARPcompensationrules