Financial Markets in Crisis: Treasury and Congress to Expand the Reach of Government Oversight of Executive Compensation Matters to All Public Companies

June 10, 2009

Long-Awaited Treasury Guidance Issued on Executive Compensation Standards Applicable to TARP Recipients

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on today’s announcement[1] by the Treasury Department of a broad reform effort to bolster effective risk management and to align compensation practices with shareholder interests at all public companies.  Additionally, the Treasury Department issued its long-awaited guidance on the enhanced executive compensation and corporate governance standards applicable to any institution that has received or will receive financial assistance under the Troubled Asset Relief Program (“TARP”) pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), as modified by the American Recovery and Reinvestment Act of 2009 (“ARRA”).

Treasury Department Announces Broad Based Reform to Executive Compensation and Governance Matters at all Public Companies, with Focus on Firms in the Financial Services Industry

Since the passage of ARRA, there has been a great deal of high-profile congressional efforts to curb compensation of the executive officers and other highly compensated employees of TARP recipients, as well as renewed efforts to create a “Shareholder Bill of Rights,” including an advisory “say-on-pay” vote for executive compensation, applicable to all public companies.  Similarly, SEC Chairwoman Mary Schapiro has made recent statements about the need for enhanced disclosure of compensation practices at public companies.  Today’s announcement by Treasury Secretary Geithner suggests that the Obama administration, Congress and the SEC will work in concert to develop a comprehensive new regulatory framework for compensation practice and disclosure.  Secretary Geithner made clear in his statements that the Treasury Department is not suggesting that there be any government-mandated caps on executive pay or exact prescriptions on how companies should set compensation.  Instead, the announcement was framed as the development of “standards that reward innovation and prudent risk-taking, without creating misaligned incentives.”

The broad-based principles announced by the Treasury Department are:

  • Compensation plans should properly measure and reward performance.
  • Compensation should be structured to account for the time horizon of risks.
  • Compensation practices should be aligned with sound risk management.
  • Golden parachutes and supplemental retirement packages should be reexamined to determine whether they align the interests of executive and shareholders.
  • Transparency and accountability should be promoted in the process of setting compensation.

In order to promote transparency and accountability, Secretary Geithner stated that the Treasury Department will support Congress’s efforts to pass “say-on-pay” legislation and will propose legislation to heighten the independence requirements of compensation committee members (akin to the independence requirements of members of an audit committee under the Sarbanes-Oxley Act of 2002) and provide the compensation committee with the authority to engage outside consultants and counsel.  The Treasury Department also released “fact sheets” on the proposed “say-on-pay”[2] and compensation committee independence matters.[3]  Secretary Geithner did not go into any detail on how Congress will implement the other principles outlined above, but suggested that enhanced compensation committee oversight, empowerment of a public company’s risk officer and increased shareholder involvement through a “say-on-pay” vote will ensure that (i) executive and shareholder interests are aligned to achieve long-term value creation and (ii) executives are not rewarded either for taking excessive risk or with lucrative “walkaway” packages where shareholders have lost value.

Although Secretary Geithner stated that the Treasury Department is not proposing an ongoing government role in setting policy on compensation generally, he also emphasized “the importance of efforts being taken by Federal Reserve Chairman Ben Bernanke and bank supervisors to lay out broad standards on compensation that will be more fully integrated into the supervisory process.”  In earlier statements, Secretary Geithner has stated that all parts of the financial industry, from banks and insurers to hedge funds and private equity firms, must be incorporated into this broad reform effort.  On May 20, 2009, Congress enacted the Fraud Enforcement and Recovery Act of 2009 which established a bipartisan Financial Crisis Inquiry Commission to examine the causes of the current financial and economic crisis in the United States.

Additionally, on June 11, 2009, the House of Representatives Committee on Financial Services, chaired by Rep. Barney Frank, will hold a hearing entitled “Compensation Structure and Systemic Risk,” citing that experts believe that compensation practices in the financial services industry that encouraged excessive or unnecessary risk-taking contributed to the current economic crisis.  In a statement released today, Rep. Frank stated that he believes the Treasury Department should go further than its broad-based principles and that the SEC should set principles which prevent a board of directors or compensation committee from providing compensation plans that lead to excessive risk-taking.  It is not clear at this time whether there will be different regulatory schemes on executive compensation and corporate governance standards applicable to all public companies, on the one hand, and to all financial institutions, on the other hand.  Members of the Treasury Department, Chairwoman Schapiro and legislators have all indicated that today’s announcement is the continuation of a dialogue with a wide range of stakeholders in the weeks and months ahead.

Treasury Department Issues Long-Awaited Guidance on Executive Compensation and Corporate Governance Provisions Applicable to TARP Recipients

Approximately five hours after Secretary Geithner’s statement, the Treasury Department issued a 123-page Interim Final Rule[4] (the “Treasury Guidance”) to provide guidance on the executive compensation and corporate governance provisions of EESA, as modified by ARRA.  Since the enactment of ARRA, there has been confusion as to the application of the executive compensation and corporate governance standards applicable to TARP recipients.  This confusion was exacerbated by a Treasury Department announcement on February 4, 2009 (thirteen days prior to the enactment of ARRA) which outlined a different set of executive compensation standards.  Today’s Treasury Guidance appears to consolidate all of the executive compensation-related provisions applicable to TARP recipients and supersedes all prior rules and guidance related thereto (including the Treasury’s February 4, 2009 guidance).  In addition to providing detail on the executive compensation and corporate governance provisions previously enacted with the passage of ARRA,[5] the Treasury Guidance also sets forth the following new standards pursuant to the authority granted to the Treasury Department under ARRA:

  • Enhanced disclosure of perquisites offered to senior executive officers and other highly compensated employees;
  • Enhanced disclosure related to compensation consultant engagement; and
  • Prohibition on tax gross-up payments to senior executive officers and other highly compensated employees.

U.S. Establishes “Office of the Special Master for TARP Executive Compensation” (the Pay Czar)

Today, the Treasury Guidance also established the Office of the Special Master for TARP Executive Compensation (the “Special Master,” or what has been referred to in the press as the Pay Czar).  The current Special Master is Kenneth Feinberg, who is known for overseeing payments to the families of the victims of the September 11, 2001 attacks.  Mr. Feinberg is empowered to review and approve compensation payments and compensation structures applicable to senior executive officers and other highly compensated employees for TARP recipients who have received “exceptional assistance” (i.e., Citigroup, Bank of America, AIG, General Motors, GMAC, Chrysler and Chrysler Credit).  Additionally, TARP recipients not receiving exceptional assistance may seek an advisory opinion from the Special Master with respect to compensation payments and structures.

The Gibson, Dunn & Crutcher Financial Crisis Markets Group will continue to monitor these developments and will provide a detailed analysis of the Treasury Guidance in the coming days.


  [5]   For a description of the ARRA executive compensation and corporate governance standards, see Gibson Dunn & Crutcher Update dated February 17, 2009.

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098,
John F. Olson – Washington, D.C. (202-955-8522,
Amy L. Goodman – Washington, D.C. (202-955-8653,
Alan Platt – Washington, D.C. (202- 887-3660,
Michael Bopp – Washington, D.C. (202-955-8256,

Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671,
K. Susan Grafton – Washington, D.C. (202- 887-3554,
Brian Lane – Washington, D.C. (202-887-3646,
Lewis Ferguson – Washington, D.C. (202- 955-8249,
Barry Goldsmith – Washington, D.C. (202- 955-8580,
John H. Sturc – Washington, D.C. (202-955-8243,
Dorothee Fischer-Appelt – London (+44 20 7071 4224,
Alan Bannister – New York (212-351-2310,
Adam H. Offenhartz – New York (212-351-3808,
Mark K. Schonfeld – New York (212-351-2433,

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514,
Christopher Bellini – Washington, D.C. (202- 887-3693,
Amy Rudnick – Washington, D.C. (202-955-8210,
Dhiya El-Saden – Los Angeles (213-229-7196,
Kimble C. Cannon – Los Angeles (213-229-7084,
Rachel Couter – London (+44 20 7071 4217,

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589,
Richard Russo – Denver (303- 298-5715,
Dennis Friedman – New York (212- 351-3900,
Stephanie Tsacoumis – Washington, D.C. (202-955-8277,
Robert Cunningham – New York (212-351-2308,
Joerg Esdorn – New York (212-351-3851,
Wayne P.J. McArdle – London (+44 20 7071 4237,
Stewart McDowell – San Francisco (415-393-8322,
C. William Thomas, Jr. – Washington, D.C. (202-887-3735,

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065,

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918,
Jennifer Bellah Maguire – Los Angeles (213-229-7986,

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512,
Alan Samson – London (+44 20 7071 4222,
Andrew Levy – New York (212-351-4037,
Fred Pillon – San Francisco (415-393-8241,
Dennis Arnold – Los Angeles (213-229-7864,
Michael F. Sfregola – Los Angeles (213-229-7558,
Andrew Lance – New York (212-351-3871,
Eric M. Feuerstein – New York (212-351-2323,
David J. Furman – New York (212-351-3992,

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804,

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969,
David M. Feldman – New York (212-351-2366,
Oscar Garza – Orange County (949-451-3849,
Craig H. Millet – Orange County (949-451-3986,
Thomas M. Budd – London (+44 20 7071 4234,
Gregory A. Campbell – London (+44 20 7071 4236,
Janet M. Weiss – New York (212-351-3988,
Matthew J. Williams – New York (212-351-2322,
J. Eric Wise – New York (212-351-2620,

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582,
Paul Issler – Los Angeles (213-229-7763,

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385,
Charles F. Feldman – New York (212-351-3908,
Michael J. Collins – Washington, D.C. (202-887-3551,
Sean C. Feller – Los Angeles (213-229-7579,
Amber Busuttil Mullen – Los Angeles (213-229-7023,

© 2009 Gibson, Dunn & Crutcher LLP

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