Executive Compensation: Updates

Brief on my own forty-two cents this go-'round, but heavy on the inbox house-cleaning ...

Backdating

Juniper Networks settled a shareholder derivative suit for $169 million. This is the third largest settlement for such suits (United Health at $900 million, Comverse at $225 million, followed by fourt-place Broadcom at $160 million). Speaking of Broadcom, while the SEC dropped its litigation against several Broadcom execs and general counsel, legal analysts have chastised the company for capitulating to shareholders due to "litigation fatigue."

Business Bankruptcy

Recently U.S. Bankruptcy Judge Kevin Carey approved one of several compensation proposals submitted by the Tribune Company (think Chicago Tribune and LATimes). Objections were filed to the plan, but the Judge found 11% of the company's 2009 cash flow as apportioned to 720 managers in bonuses "incentiv[izing]". A little tongue-in-check there, but it amounts to $45.6 million in manager bonuses.

Bank of America (BofA)

Let's start with the uncontroversial: formerly of Merrill Lynch, John Thain finally found work. As a fellow job seeker, *yay* John.

The Cuomo complaint is making the rounds: allegations that BofA and outside counsel Wachtell had in fact agreed to disclose 4Q08 Merrill losses, but the decision was reversed later by Mayopoulos alone; Wachtell "marginialized." Allegations also include Mayopoulos being fed inaccurate information by BofA executives regarding the losses (and therefore affecting his judgment as regards disclosure).

And so it's no suprirse then, that S.D.N.Y Judge Rakoff has not only refused to approve the newly proposed $150 million settlement, but gave SEC counsel a hard time over why NYAG Cuomo's complaint is different, and has recently asked for ALL discovery materials regarding BofA's former general counsel Mayopoulos' dismissal.

Oh, and if any of this behaviour suggests that a substantial bonus payment to various BofA employees would be a PR nightmare, you apparently would be wrong: $4.4 billion goes out to Ibanking employees for their 2009 performance (that's an average bonus of $400,000 per person). Though in fairness: those who are receiving larger bonuses will receive stocks vesting over a several year period.

Compensation Czar

So AIG paid-out contractually agreed to bonuses this year, and the whole of D.C. is trying to determine how to stop it.

Pay Practices

But AIG has heard enough of the populist outcry, and so re-jiggered its pay practices. Analysts and commentators still suggest the jiggering will not satisfy regulators.

Barclay's also tweaked their pay packages and structures. The President and Chief Executive waived their 2009 bonuses; other executives' compensation was deferred and other bonuses were paid in stock.

Mr. Blankfein at Goldman, however, took a $9 million all stock bonus for 2009. The bonus is considered conservative, as Blankfein took a $67.9 million bonus in 2007. No "magic formula" apparently.

Re-Regulation

The Administration's banking plan has Wall St. upset, mostly because cash cow proprietary trading is on the chopping block. Paul Volcker has been quite clear: either have access to federal backing or continue the proprietary trading.

It is little wonder lobbying efforts are up. Is "up" a dimunitive term here? FWIW: Former Treasury Secretary Henry Paulson doesn't like the plan.

The Administration's bank plan also contains disincentives for banks that grow too large to fail. On this theme: JPMorgan got a little bit bigger recently, and then one of its Athens' offices was bombed.

Recall rampant media discussion about the Webb-Boxer Taxpayer Fairness Act - the "Jobs Bill?" A banker tax may be included among the amended provisions. Proposed as a windfall bonus tax, the first $400,000 is exempt.

Separately, Senator Dodd's bank reform legislation has an impasse to overcome ...


Photo credit: Oliviadei.

Executive Compensation Re-Regulation: Congress, the Federal Reserve, and the Securities and Exchange Commission

A team I have been working with just fed updates on a research document to some journals >> I scored a new section on executive compensation re-regulation! Each piece of re-regulation described below focuses on localized risk reducing initiatives in the name of the greater financial system.

Congress

The Corporate and Financial Institutional Compensation Fairness Act of 2009. Introduced by Representative Barney Frank (D-MA) in July, and out of Committee and the House Floor that same month. It is currently sitting in the Senate Committee on Banking, Housing, and Urban Affairs. (Most of the commentary I read suggested it would be dealt with there in the Fall of 2009, however …).

The bill amends the '34 Act to give shareholders a nonbinding advisory vote on all issues of executive compensation. Interesting trick here: institutional investment managers that cast such votes are required to publicly disclose how they voted – each year. There is also some discussion about compensation committee members – rules preventing conflicts of interest (so a prohibition on taking any sort of consulting or advisory fees from the issuer). Second interesting trick: the bill directs nearly a dozen federal regulators to formally convene and create new compensation and disclosure rules. One piece of construction guidance offered in the bill: individuals' specific income should not be disclosed. There you go, Tea Partiers. Here is the text of the bill.

The Federal Reserve ("Fed")

The Fed has issued Proposed Guidance on Sound Incentive Compensation Practices. I was deceived when I first opened the Federal Register; it sounded aspirational, at best. On the contrary – I counted the number of times the Fed threatened a poor supervisory rating or an enforcement action for failing to remedy a deficiency - twice - and the number of times the Fed directed immediate effort by banking organizations to come into compliance – three.

Every banking organization under the Fed's supervision is required to come into compliance with the guidance. The guidance is applicable to both executive employees and lower-level employees; it is more targeted towards any employee whose work responsibilities expose the employer bank organization – and again, the larger financial banking system as a whole – to risk. Interesting here: rather than establishing one rule for twenty different types of banking organizations, the guidance states several principles the Fed wants all of the banking organizations to come into compliance with; how any one bank abides by the principles is self-determined. The principles focus on managing the relationship between incentive compensation and employee risk-taking. Broadly, incentive packages should not encourage employees to risk-take beyond the employer banking organization's internal ability to identify, manage, and support that risk. As a means of collecting best practices (maybe a structural means of pushing compliance?), the Fed has created a scheme to supervise compliance. There are two tracks: one for large complex banking organizations ("LCBOs") and a second for smaller, less structurally complicated banking organizations. LCBOs are expected to offer a compensation plan to the Fed; smaller organizations will be assessed on compliance as a part of their annual risk examination process. You can read the text of the Fed's guidance in the Federal Register here.

The Securities and Exchange Commission ("SEC")

In an effort to better enable investors trying to identify the internal risk assumption and reward of a company, the SEC has adopted amendments regarding the disclosure of all employees' compensation. The new disclosure rules are effective February 28, 2010.

Companies are expected to disclose compensation practices that create the risk of a "reasonably likely" "material adverse" effect on the company. Companies are in fact to list situations occurring with their pay practices and among their employees that illustrate when a compensation practice does in fact create a "reasonably likely" risk of "material adverse" effect. (It appears there was a give-and-take during the comment period on the language.) Stef commentary on the effectiveness of the forthcoming disclosure: the list is explicitly non-exhaustive … The disclosure will be made in a new paragraph in Item 402 of Regulation S-K.

Also as regards company disclosure of stock and option grants in the Summary Compensation and Director Compensation Table – use the aggregate fair value grant date and footnote performance awards to disclose an award's maximum value.

(The SEC also voted to approve amendments: creating greater transparency for investors in determining conflicts of interest as regards compensation consultants; and a variety of disclosures regarding the board of directors, as regards nominee and director qualifications, the board's diversity, and the board's structural leadership.)

The final version of the SEC's amendments can be found here.

Image credit: SEC.

ExeComp in the News: SEC Goes For the Kill, and then there's Attorney General Cuomo, AIG, and London Bankers

Bank of America. The core of the SEC charges to date (trial beginning March 1, 2010) focuses on the alleged improper BofA disclosure of the Merrill bonsues to its shareholders. The SEC has asked Judge Rakoff of the S.D.N.Y. to add an additional allegation – failure to properly disclose the Merrill 4Q 2008 losses! Rakoff has said the additional allegation can not be added to the current litigation, but the SEC can always file a new complaint. How many lawyers' kids can go through grad school on BofA's tab: check it out here, here, or here.

City of London bankers are threatening to leave town. (Really? You're going to have your spouse leave his job, pull your kids out of school, buy and sell property, and get vet paperwork done on the dog ... Really?) Though admittedly, this is a lot to handle at once: in addition to Darling's intent to levy a one-time 50% tax on bonuses equal to or greater than $ 40,700, the FSA announced recently that compensation for banking employees earning $1.6 million per year will have their compensation deferred - as much as 60% and for as long as three years! Check it out here or here.

In response to the potential 50% tax, financial firms have indicated they will just pay their employees more money (incidentally, at the cost of the shareholders). In this way, the tax will be spread out over the global resources of the organization. Okay. Or, you could just pay the one-time tax on bonuses. One-time. On a bonus.

Remember Andrew Cuomo? Yeah – he didn't think so either, so he's leveraged the Martin Act again and made a demand this week on eight companies that received government financing to disclose their 2009 bonus pool information. When is that election again? Hope it comes and goes before folks realize earlier Cuomo threats leveraging fraudulent conveyance allegations against AIG – which culminated in a very public AIG "we'll give almost all of it back" – has in fact only produced a fractional return of the bonuses. What's a candidate to do? Check it out here.

Speaking of AIG – a new GC is being named: Thomas Russo (previously with Lehman). Here's hoping he rolls with the Compensation Czar's style more easily than his predecessor. Or, maybe AIG could just pay the $183 billion in federal financing back.

Bank of America, AIG, and Comverse

I have a post I am writing on dischargeable suits in business bankruptcy, but am right now pressed for time (and since we're all subject to the nightmare that is the first week back from the Holiday, am summarizing here articles I would have otherwise turned into a post >> thanks for your patience!).

AIG GC Anastasia Kelly's threat to walk in light of Compensation Czar Feinberg's December rulings on pay was real - she is in fact leaving, and with several million in severance compensation. This blawg's discussion of Compensation Czar Feinberg can be found here.

My most favorite legal actor right now, Bank of America!! As we all prepare for the March 1 trial date, Rakoff of the S.D.N.Y. ruled Monday that BofA would not be able to present expert testimony that media reports of the Merrill bonuses constituted disclosure to shareholders. This blawg's discussion of BofA can be found here.

Part of Comverse Technology Inc.'s $ 225 million stock option backdating settlement will include a $1 million contribution by former GC William Sorin (which in exchange will drop a pending suit waged against him by the company). Some of this blawg's discussion of stock option backdating can be found here.

UPDATE: executive compensation, corporate governance, and securities

I am so tired I want to scratch my eyes out. And so in lieu of going blind, I am only posting updates of some of what has transpired over the last two weeks regarding some of my pet issues. FWIW - presented here briefly to bring this blawg up-to-date. Thanks - have a *Great* New Year's!!

Bank of America

So with only two weeks left in the year, and right after they repaid their federal funding, BofA chose a new CEO ... who knew it would be the same guy who had a hand in the way the Merrill merger closed and who did not impress Congress while testifying about it. Oh, and FYI: the SEC has broadened its investigation.

Bank Closings

We're now up to 140 banks the FDIC has closed in 2009 alone. Good times.

Banker Bonuses

France follows the U.K. and levies a hefty tax on banker bonuses. Some call it "unfair."

Goldman is a veritable money machine, but there are rumblings inside that the "ethos" has changed ... which is largely of no importance to the demonstrators on the street who still want to see the firm burn.

Outgoing Morgan Stanley CEO John Mack has, for the third year in a row, rejected his year-end bonus. He noted the "unprecedented environment" and "extraordinary financial support" the federal government has used to buttress the banking industry. Morgan Stanley itself is modifying its compensation structure; nothing is definite yet, but rumour is that nearly 2/3rds of executives' pay will come in the form of stocks and will be subject to a clawback provision.

And whether you needed a rumour to confirm it: that all important meeting between banking heads and the President was more show than anything else. From whose perspective, I wonder ...

Compensation Czar

Citi Group and Wells Fargo got out from under TARP restrictions, including Kenneth Feinberg's executive compensation rulings. Good week for Citi - they also got a tax break.

It was announced just yesterday that GMAC will receive several billion more in federal funding.

And just as we learn about the inner turmoil AIG faced as it melted, we shouldn't be surprised bonuses promised to NYAG Cuomo to be be repaid are slow in materializing ... Oh, and Feinberg's recent rulings were modified in light of some fits thrown at AIG.

Re-regulation

The ABA is out to destroy it.

Barney Frank's Wall Street reform package includes significant regulation of the credit rating agencies, including offering investors the explicit right to sue the agencies.

Stock Option Backdating

Broadcom criminal suits are dismissed; all three. Just today, then, Broadcom antes up to settle outstanding shareholder suits.

Similarly, Comverse settles for a record amount, represented by our favorite counsel du jour, Wachtell.

Published! Allen and I scored a Special Feature on Law.com

(Gratuitous self-congratulations - please forgive! - but wanted to drop a quick post: Allen and I have been working hard to get several short articles into legal publication, and one of our pieces was picked up this week. Very exciting!)

Executive Compensation at a Turning Point >> please check it out if the topic interests you!

Goldman only awarding equity bonuses to executives in 2009 (stock cannot be sold for five years!)

Pretty hot in light of the British move yesterday. Check the WSJ alert that just came up on my handheld:

Goldman Sachs says its top executives won't get cash bonuses in 2009 and will instead receive stock that cannot be sold for at least five years. In addition, shareholders will have an advisory vote on the firm's compensation of executives at the annual meeting in 2010.

The investment bank saw its third-quarter profit soar as rallying equity markets led to trading gains and strong investment performance. The firm had set aside $5.35 billion for benefits and compensation during the quarter, putting bonuses on track to set a record this year.

Wall Street has come under severe criticism in the wake of last year's financial crisis, with critics saying that the Street's compensation regime led its players to focus excessively on short-term gains.

Feinberg rulings expected Friday: Bank of America paid-off money yesterday, Citi looking to pay-off today

It's kind of funny.

Just a quick note: Bank of America announced yesterday it had repaid the federal government the $45 billion in federal funds it received under the TARP program. The company sold stock to create the liquidity. From outgoing Ken Lewis, "We owe taxpayers our thanks."

The move will most definitely help the stalled BofA CEO search.

Politico reported this morning that Citi also intends to announce today it will repay the federal government. A similar equity sell is anticipated to repay the $20 billion in federal funds the company received.

Britain has a "one-time" tax of 50% on bonuses over $40,000

I don't really have a thumb on British politics, but I think I can safely say most American commentators were a little surprised by this move.

Chancellor of the Exchequer Alistair Darling gave a pre-budget report to Parliament yesterday in London. During the speech he announced a one-time 50% tax on bonuses paid in the banking sector that are the equivalent of $40,700 and over. All banks are affected: whether they accepted British government funds or not, and whether they are British or not. If you're a bank with an office in London, you're British employees are paying this tax.

I am not going to conjecture as to the impetus behind this policy; plenty of other commentators are. Rationales include: trying to close Britain's deficit, recouping some of the money spent to buttress the British financial system, or perhaps a political gesture for the large bonuses that are anticipated to be cut at year's end (and the subsequent populist fall-out). I haven't, however, read too many commentators opining this is an adept method to curb banker risk-taking, which I thought was the universally identified boogey-man for the economic crisis ...

It's being reported everywhere, including at Bloomberg, theNYTimes, and the WSJ.

"Wake-Up Gentleman," warns Volcker to Bankers

Whoa. Those are strong words. But I guess if Paul Volcker can't say it – Fed Chairman for years 1979 through 1986 - then I guess there are few others who can.

The WSJ organized a Future of Finance Initiative conference yesterday that brought various bankers and regulators together to discuss reform measures. The Times Online ran a great article this morning with some of the more intriguing quotes. Volcker's "wake-up" statement was in response to a discussion on executive pay, calling the bankers' response to the issue "inadequate."

Also quoted was Sir Deryck Maughan, partner in the private equity firm Kohlberg Kravis Roberts. Maughan focused on the modeling behind the financial instruments, suggesting Wall Street has not "faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors."

(As a side note, there was also an influential Baroness – and advisor to the G20 and Britain's Gordon Brown – who attended the conference and is quoted by the Financial Times. It's like a lunch meeting of an elite group of financial super heros or something.)

The George Soros was evidently also in attendance, and in fact spoke about banning credit default swaps ("CDS"), describing them as "toxic."

This stuff is great fodder for the imagination; please check the Times Online for its report.

In Feinberg we trust: will he blink in light of AIG threats?

It has been well-reported by various media that TARP Pay Czar Kenneth Feinberg may blink in light of five AIG employees threatening to walk if their pay is limited to $500,000 per year.

Let me say first that until Feinberg actually releases his rulings, and provides rationale for this alleged accommodation, I have hope in his discretion. He is, afterall, the person closest to the issues involved in the pay caps placed on companies who have not yet repaid their TARP funding. And truthfully, the law does allow Feinberg to award compensation above the $500,000 cap for “good cause.” Feinberg has already broken this cap in three instances for AIG employees: CEO Benmosche, CFO Herzog, and Property Casualty Chief Moor. Those rulings were released earlier this Fall when Feinberg considered the compensation of the top twenty-five highest paid employees at AIG. The allegation of accomodation now, however, focuses on Feinberg’s current consideration of the compensation for the next seventy-five highest paid employees at AIG.

The alleged accommodation strikes me as dangerous precedent for Feinberg’s office. Afterall, if one company is allowed to pay above the compensation limits in light of a threat to walk, then why not a second or third? What’s really intriguing to me is how well Feinberg has to date maintained cooperation from these companies regarding pay restrictions; a matter both highly sensitive and normally internal. One concern is that this alleged accommodation is the first kink in that cooperation, and consequently in Feinberg’s authority and the effectiveness of his office.

People “close to Feinberg” indicate the accommodation has nothing to do with the threat of employees walking. Other sources indicate two of the five AIG employees have since rescinded their threat to walk.

But the initial stonewall by the AIG employees does strike me as short-sighted. In light of the current economic turmoil and the real struggle that many middle and lower class Americans face, I am curious at what is the real drama behind accepting half a million dollars for a year’s work. Surely some compromise could have been reached regarding form of compensation, and perhaps deferred compensation. Presumably, these circumstances would exist only for a year or three? Though perhaps AIG does not have the ability to repay the federal funds in the next several years? AIG received a total of $183 billion dollars in federal funds. I don’t know, but again am very interested in Feinberg's rulings themselves (hopefully released later this month).

Outside of the scope of this post, but it would be interesting to compare and contrast the work responsibilities and value added of the five AIG employees threatening to walk, to that of Citi’s Andrew Hall. Recall, earlier this summer Citigroup actually spun-off part of its organization to accommodate an employee who had earned $100 million in bonus awards for the work performed. The move also accommodated the federal government and the TARP pay restrictions. Which factor in the TARP discussion has so-changed that we have gone from Citigroup’s handling of the matter, to AIG’s?

The story is everywhere, including Bloomberg and the WSJ. This blawg’s writing about Kenneth Feinberg is located here.

EVERYTHING Bank of America produced to Cuomo and Congress goes to plaintiffs in the S.D.N.Y.

Bad week for BofA. For several reasons, but in the case of this post: S.D.N.Y. Judge Denny Chin ruled earlier this week that plaintiffs proceeding before him against BofA are entitled to whatever documents BofA has produced to date.

To be clear, this includes the otherwise privileged documents that BofA agreed to produce to Cuomo, the SEC, Congress ... It is speculated the protective order those documents were produced under (and was conceivably requested to prohibit any other parties from having access to these documents) can be construed as protecting from protection only those documents not already produced or requested by Cuomo, the SEC, Congress ...

Recall: a separate plaintiff's suit is proceeding against BofA in the Delaware Chancery Court, and earlier this month was awarded the right to request discovery of the same otherwise privileged documents.

Chin's order is here. Rakoff's protective order is here. BofA's litigation settlement allocation is here (joking. not really).

Bank of America's CEO Search Does Not Look Like Fun …

So we now know GMAC's Molina is out of consideration, and evidently so is Prudential's Demchak. It is rumored Demchak pulled himself out of contention due to government restraints on BofA: both in terms of his own compensation, and it is alluded, as regards the ongoing litigation and investigation regarding the Merrill acquisition.

(There is also speculation that BofA's Moynihan is being considered. Let's check his track record: BofA GC for 7 days where his law license was inactive; and his recent total lack of believability in front of Congress. Yeah - am thinking the Board is going to pass.).

Lewis leaves in six weeks; BofA has only six weeks to name executive leadership. Sounds somewhat dire … but maybe not: Chairman Massey is currently on Holiday on a boat somewhere and was inaccessible for comment (not a joke).

Playful conjecture does suggest former Merrill CEO and currently unemployed John Thain is interested in the position, however (am pretty sure that is a joke).

The alleged exodus of talent in light of Czar Feinberg's rulings

If I saw some mass exodus, which I do not anticipate, that would require me to
rethink some of the basic assumptions that have entered into my determinations.

Kenneth Feinberg, Monday's Reuters Conference. This blawg's discussion of Feinberg as Compensation Czar is here.

BREAKING: Treasury released rules on compensation rules

I was - literally - just writing a post on how overblown the last 24 hours in the news has been over a rumour about Feinberg's rulings. And then voila: a Treasury document containing proposals and Q & A transcript pops up on my handheld. Comments are of course being solicited by the Federal Reserve.

Will make an effort to digest through the day >> more posts coming.

Hat-tip: WSJ.

BREAKING NEWS: Feinberg cuts salaries by 90%, on average

Breaking news, sort of: maybe? Several large business media outlets are reporting that Feinberg has made several ambitious rulings in regard to the compensation proposals submitted to him. I am tepid to qualify this as "breaking" or as "news," since the source cited is vague at best: CNN cites the WSJ and the NYTimes as sources, and Bloomberg merely cites "people familiar with the matter." Okay ... Here's the gossip:

- total compensation for 175 employees is lowered by 50%;
- on average, salaries themselves drop 90%;
- corporate governance changes are demanded, including: disallowing the Chairman of the Board to also be CEO, requiring a Board committee to assess risk, and eliminating staggered boards;
- no one (really? what about Benmosche?) at AIG will receive more than $200,000 in compensation

FWIW (though am more eager for Treasury Department documents or media attention to Feinberg's own statements). This blawg's discussion of Feinberg is available here. Todays news was reported by Bloomberg, CNN, NYTimes, Reuters, and the WSJ.

Ken Lewis takes no salary or bonus for 2009!

No worries - Dude takes home over $100 million in a retirement package regardless (which conveniently for him, was arranged before BofA received federal monies and came under the supervision of Treasury's Special Master for TARP Executive Compensation, Kenneth Feinberg).

I posted earlier today about Feinberg and AIG, but Feinberg has struck again: he has knocked Lewis' $1.5 million base pay to zero - and Lewis has agreed. Lewis, in fact, will have to repay $1 million back to BofA for salary already received this year.

Hat-tip: WSJ.

Photo credit: Dealbreaker.

Compensation Czar Feinberg and Special Inspector General Barofsky Put the Screws to AIG

For purposes of clarity, know that Kenneth Feinberg is Treasury's Special Master for TARP Executive Compensation, as appointed by the Obama Administration. Allen has defined Feinberg's responsibilities here. Barofsky, on the other hand, is the Special Treasury Department Inspector General who oversees the whole of how TARP is administered.

It hit the news cycle across the board Tuesday that Feinberg, in reviewing AIG's compensation plans for close of 2009, has asked the company to reduce bonuses slated to be paid to it's trading unit (the unit largely creditted with AIG's less-than-stellar 2008 performance). Problem: those bonuses were promised and contracted for prior to AIG's receipt and engagement of TARP provisions (Fed and Treasury monies). Big threat on the table? Feinberg has threatened to reduce the pay of other executives if the bonuses of the trading unit are not reduced. How's that for compromise?

Relatedly, an audit of the of the $165 million paid out in retention bonuses in March (also contractually agreed to preceding the federal bailout) show that not only did the payments not work to keep everyone on staff, but some people who are not necessarily indispensable to AIG's business line received money ($7,700 for a kitchen assistant, $7,000 for a mailroom assistant, and $700 for a file administrator) (as a related aside: it will take me three months of full-time work as a young attorney to net $7,700).

The Compensation Czar

Last month, the Obama administration announced the appointment of Kenneth Feinberg (photo at left) as the Special Master for TARP Executive Compensation (the “Special Master,” commonly referred to as the “compensation czar”). At the seven firms that have received “exceptional assistance” from the government - AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial - the Special Master must determine whether the compensation payments and structure for the senior executive officers and the twenty next most highly compensated employees may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. Additionally, regarding any remaining executive officers and the 100 most highly compensated employees, the Special Master must determine whether the compensation structures may result in payments that are inconsistent with the purposes of TARP or contrary to the public interest. The Special Master may also render advisory opinions on his own initiative as to whether compensation payments or structures at any TARP recipient meet the appropriate standards.

Whenever the Special Master reviews compensation payments or structures for consistency with the purposes of TARP or conformity with the public interest, he must consider the following principles: 1) avoidance of incentives to take unnecessary risk, 2) taxpayer return, 3) appropriate allocation among the components of compensation, 4) appropriate portion of performance-based compensation, 5) comparable structures and payments, and 6) employee contribution to TARP recipient value.

Feinberg is a lawyer who has worked for the federal government, and more recently has headed his own law firm. He is perhaps best known for his role as Special Master in charge of dispensing billions of dollars to victims of the 9/11 attacks. Feinberg, however, apparently has no experience working at financial institutions, insurance companies, or car manufacturers, and yet he will be setting pay for over 100 employees at each of seven companies in these industries.

The labor market in the banking industry is highly competitive, with certain institutions - notably foreign banks - aggressively pursuing employees of banks that received TARP money. Will Feinberg allow these companies to pay their highly compensated employees enough to prevent them from jumping ship? The two car companies subject to the Special Master’s oversight are winding their way through bankruptcy court and are trying to reinvent themselves to become competitive in a highly volatile industry. What is the appropriate pay for the CEO of a car company, once the crown jewel of American manufacturing, which is feverishly switching gears to build cars that people want? The six principles mentioned above will help, but they will get Feinberg only so far. I question whether Feinberg has the proper experience or can possibly acquire all the necessary information about the banking, insurance and car industries to deem what constitutes appropriate pay for the affected highly compensated employees.

Bonus Restriction on Banks Receiving Government Bailout Money

It is well known that as part of the bank bailout bill, Congress imposed pay restrictions on executives at banks that receive government money. These pay restrictions were further strengthened in the American Recovery and Reinvestment Act of 2009 (the “Recovery Act,” a/k/a the “stimulus bill”). A noteworthy and particularly controversial pay limitation in the Recovery Act requires that bonuses to a certain number of employees (depending on how much government money the bank receives) be limited to long-term restricted stock, and the stock’s value may not exceed one third of the employee’s total annual pay (the “bonus restriction”). For example, an executive subject to the bonus restriction who is paid $1 million in salary would be limited to a bonus of $500,000 in the form of long-term restricted stock. The more government money a bank receives, the greater the number of employees that are subject to the bonus restriction. For example, a bank that receives $500 million or more from the government must apply the bonus restriction to its senior executive officers and at least the 20 next most highly-compensated employees.

The question of how to identify a bank’s “most highly-compensated employees” was left open in the Recovery Act. One interpretation was to designate “most highly-compensated employees” based on pay in the current fiscal year, while another interpretation was that “most highly-compensated employees” were identified based on pay in the previous fiscal year. The Treasury Department’s interim final rule, effective as of June 15, 2009, settles the question by stating that “most highly-compensated employee” status is determined based on annual pay earned in the prior year. This, however, does not resolve the “intentional cycling” issue.

Suppose a bank received $500 million of government money in late 2008 and will not repay the government for at least another couple of years. Pursuant to the Recovery Act, the bank in 2009 must impose the bonus restriction upon the twenty five employees who earned the most money in 2008 (“Group 1”). Due to the pay restriction, however, Group 1 is not likely to be the highest paid in 2009, so a different group of twenty five employees (“Group 2”) would be the highest paid in 2009. Group 2 would thus not be allowed to earn bonuses in 2010 while Group 1 could. This could result in a weird game of leapfrog where groups of twenty five employees trade places as the highest paid every year.

The Treasury Department addresses this issue in the interim final rule. It offers a couple of potential methods to mitigate “intentional cycling” by: identifying “most highly-compensated employees” based on an average of the preceding two or three years’ annual compensation, or requiring certain “most highly compensated employees” identified for one year to remain subject to the restriction for a certain number of additional years regardless of subsequent levels of compensation. The Treasury Department invites comment on this issue, including the extent “intentional cycling” is likely to occur, and potential ways to address the issue.

If you wish to comment on this issue or any topic addressed in the interim final rule, you can contact the Treasury Department by e-mail at executivecompensationcomments@do.treas.gov or via snail mail (in triplicate) to Executive Compensation Comments, Office of Financial Institutions Policy, Room 1418, Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.