The U.S. Treasury Department has announced new executive compensation rules that will apply under its planned bailout measures.

Treasury today announced a US$25 billon plan to recapitalize banks in the U.S. It says any financial institution participating will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program.

The financial institution must meet certain standards, including:

> ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

> required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;

> prohibition on the financial institution from making any golden parachute payment to a senior executive; and

> an agreement not to deduct for tax purposes executive compensation in excess of US$500,000 for each senior executive. Treasury is issuing interim final rules for these executive compensation standards.

As part of the Troubled Asset Auction Program, any financial institution that sells more than US$300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. These financial institutions also may not deduct executive compensation in excess of US$500,000 for each senior executive, they can’t deduct certain golden parachute payments to senior executives; and, a 20% excise tax will be imposed on the senior executive for these golden parachute payments.

Finally, the Treasury is currently developing a third program to potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. The limits that will apply to firms participating in this plan are similar to the recapitalization program except that golden parachutes will be defined more strictly to prohibit any payments to departing senior executives.

These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. Any firm participating in these three programs will be required to adopt these standards.

IE