Western Independent Banker - March/April 2009 - (Page 17)

By Gayle J. Appelbaum The Troubled Asset Relief Program and Its Effect on Executive Compensation CFO and the next three highest paid executive officers, generally determined based on proxy disclosure rules. The Four Standards Prohibition of Unnecessary and Excessive Risk. Incentive compensation plans and arrangements must not encourage participants to take unnecessary and excessive risks that would threaten the value of the institution. The Compensation Committee must review applicable compensation programs with senior risk officers within 90 days after Treasury acquires an equity or debt position, make necessary changes and annually certify that these standards have been met. Compensation Deduction Limitations. No tax deduction is permitted for annual compensation over $500,000 that is considered earned during the period. For CPP participants, this changes the annual allowable deduction under Section 162(m) from $1 million to $500,000, with no exception for “performance-based” compensation. The $500,000 limit and compensation paid may be pro-rated for the portion of a taxable year that Treasury holds an equity or debt position in the bank. Golden Parachute Restrictions. In the event of an involuntary separation, benefits are limited to 2.99 times an executive’s five-year average W-2 compensation. Any amount in excess of this limit is viewed as a golden parachute payment and is prohibited. Payments payable to an executive upon voluntary separation (vested retirement benefits or vested elective deferred compensation payable upon termination) are not limited. Incentive Compensation Clawbacks. A financial institution participating in CPP THE EMERGENCY ECONOMIC Stabilization Act of 2008 (EESA) was signed into law on October 3. On October 14, Treasury issued notices and rules regarding executive compensation standards for financial institutions that participate in the Troubled Asset Relief Program (TARP) created under the Act. This new law attempts to establish standards regarding executive compensation for financial institutions participating in the various relief programs under this act. If your institution participates in TARP, this can clearly affect your compensation programs and require yet another iteration or evolution of executive compensation. Under the Capital Purchase Program (CPP), the federal government takes an equity position in participating financial institutions in the form of preferred stock and warrants to purchase common stock. For CPP participants, there are four compensation standards that must be adhered to during the period in which Treasury holds an equity or debt position in the institution. These standards must be applied to a class of officers referred to as Select Executive Officers (SEOs), which includes the CEO, As with any new legislation, best practices are evolving in response to ESSA. Early signs indicate that organizations are amending plans to adhere to the required standards, at least while Treasury holds an equity or debt position in the institution. Western Independent Banker March/April 2009 17

Table of Contents Feed for the Digital Edition of Western Independent Banker - March/April 2009

Western Independent Banker - March/April 2009 Contents A Message from the President & CEO Profitable Liquidity: Yes, You Can Non-Performing Assets: The Keep Versus Sell Decision Is BOLI the Way to Go? The Troubled Asset Relief Program and Its Eff ect on Executive Compensation TARP Money or Not, Secondary Offerings Belong in Your Plan 52nd Annual Conference Private Equity: Another Capital Option Strengthening Your Bank’s Bottom Line by Adapting to Difficult Times Managing Your Branch Network Capital Dealing with a Hard Insurance Market WIB Service Corporation Report WIB Calendar New Members Index of Advertisers Advertiser.com

Western Independent Banker - March/April 2009

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