Executive Compensation

by Joseph E. Bachelder

This article is reprinted with permission from the
June 19, 2009
edition of the
New York Law Journal.
© 2009 NLP IP Company.

TARP, ‘Say on Pay’ and Other Legislative Developments

Executive pay is being buffeted. It has been the subject of much legislative and other attention. The Troubled Assets Relief Program (TARP) has impacted significantly on executive pay at top levels of companies in the financial services industry that have received TARP aid.[1] Several bills pending in Congress would expand regulation of executive pay at companies receiving TARP aid, and other pending legislation would impose regulations on executive pay at public companies generally. The so-called "shareholder rights" movement continues to receive attention, including "Say on Pay" proposals directed at shareholder advisory votes on executive pay.

After a brief look at surveys showing a decrease during 2008 in executive pay levels, today's column discusses the legislative developments just mentioned, including "Say on Pay" developments. Note also is made of statements about executive pay by leaders of the current administration in Washington.

Downturn in Pay Levels

Several recent surveys indicate that median CEO pay levels declined in 2008; by comparison, in 2007 they increased over 2006.

*All percentage changes shown are based on changes in median Total Direct Compensation for the years involved. (The New York Times (Equilar) survey indicates that certain perquisites and other benefits also are included in that survey.) Methodologies used by the different surveys in computing compensation differ (including, among other things, the companies they include in their respective surveys). For an understanding of the methodologies used, the actual surveys need to be examined.

**The New York Times survey on CEO pay for 2007 (NYT, April 6, 2008) expresses the percent change in 2007 versus 2006 as a change in average level of pay rather than change in median level of pay. On this basis, the New York Times reported the change as an increase of 5% for 2007 over 2006.

Available CEO pay surveys also indicate that Total Cash Compensation (salary plus annual bonus) declined in 2008 from 2007.

Since the end of the 1990s, only one other year, 2002, showed a measurable decrease in Total Direct Compensation of CEOs from the prior year, according to available surveys. (Based on data examined for 2000-2008 (not the same surveys noted in the preceding chart), 2005 was virtually flat with 2004, but all other years before 2008 show an increase over the prior year.) In contrast, over the long term, measured decade over decade, CEO pay has consistently risen during the past half century (increases in the 1950s and 1960s, however, were not significant).[2]

A single year does not represent a "pattern," and it will take two or three more years, at least, to see whether current economic problems negatively impact on the long-term upward trend in CEO pay. Most likely, once the global economies, including the U.S. economy, return to better performance levels, executive pay levels will resume their customary trend of annual increases.


TARP.The original legislation creating TARP was enacted as part of the Emergency Economic Stabilization Act (EESA) Oct. 3, 2008. A second major TARP-related law was enacted Feb. 17, 2009, as the American Recovery and Reinvestment Act (ARRA). At the time this column was submitted for publication, the U.S. Treasury issued regulations in the form of an Interim Final Rule titled "TARP Standards for Compensation and Corporate Governance" scheduled for publication in the Federal Register June 15, 2009. Because of the timing of the issuance of the Interim Final Rule, it was not possible for this column to contain discussion of that Rule.[3]

Except for the automobile industry, the TARP "bailout" has occurred exclusively in the financial services industry.[4] And the TARP executive pay limitations are directed almost exclusively at the highest level employees of such companies—the top executive officers and, in certain respects, the most highly compensated employees irrespective of whether they are executive officers.

TARP has been the subject of two prior columns by the author. NYLJ, Nov. 14, 2008, "EESA Limits on Executive Pay at Affected Institutions" and April 14, 2009, "ARRA Amends EESA: Includes New Pay Limits at Affected Institutions."

Proposed Legislation Unrelated to TARP. On May 19, 2009, Senator Charles Schumer of New York introduced the "Shareholder Bill of Rights Act of 2009" (S. 1074), which includes two "Say on Pay" provisions.[5] The first, in Section 3(a) of the bill, would add a new Section 14A to the Securities Exchange Act of 1934 requiring each proxy statement covered by it to provide for a non-binding shareholder vote on executive compensation as disclosed in the proxy statement. The second, Section 3(c), which is titled "Shareholder Approval of Golden Parachute Compensation," would require that a person making a proxy solicitation (for an annual or other meeting of shareholders) in connection with a transaction such as an acquisition, merger or a sale or other disposition of all or substantially all of the assets of an issuer, as described in Section 3(c), must disclose in its proxy solicitation materials certain agreements and other understandings with principal executive officers of the issuer (or, in certain cases, principal officers of the acquiring issuer) that are related to the acquisition, merger or sale or other disposition. In the event disclosure is required as provided in the preceding sentence, Section 3(c) of the bill next provides that shareholders of the issuer must be given an advisory vote on such agreements and other understandings.

On May 7, 2009, Senator Richard Durbin of Illinois introduced the "Excessive Pay Shareholder Approval Act" (S. 1006). The Durbin bill mandates that no employee's compensation may exceed 100 times the average compensation paid all employees of the issuer unless no fewer than 60 percent of shareholders have voted to approve such employee's compensation within the preceding 18 months.[6]

Another bill (H.R. 1594), introduced March 18, 2009, by Representative Barbara Lee of California, would, among other things, disallow any tax deduction for compensation paid to any employee in excess of the greater of (a) 25 times the compensation of the lowest paid employee or (b) $500,000.

Proposed Legislation Related to TARP. On Jan. 9, 2009, the "TARP Reform and Accountability Act of 2009" (H.R. 384), introduced by Representative Barney Frank of Massachusetts, passed the House, but before it was acted on by the Senate, ARRA passed both houses and became law. The content of a number of provisions in the Frank bill are covered in provisions of ARRA.[7]

On Feb. 3, 2009, a bill (H.R. 807) was introduced by Representative Gus Bilirakis of Florida that would provide for the creation and maintenance by the Treasury Department of a database on compensation paid to the top executives of companies receiving TARP aid (100 executives in the case of many companies). It was referred to the House Committee on Financial Services.

Another bill (S. 431), introduced by Senator Sheldon Whitehouse of Rhode Island on Feb. 12, 2009, and referred to the Senate Committee on Banking, Housing and Urban Affairs, would, among other things, create a "Taxpayer Advocate" with duties that would include conducting "audits and oversight" of TARP recipients with respect to compensation of "officers and directors" of those companies.

On March 19, 2009, the House passed and sent to the Senate a bill (H.R. 1586) introduced by Representative Charles Rangel of New York that would impose an income tax at the rate of 90 percent on certain bonuses (within the meaning of "TARP Bonus" as defined in Section 1(b) of the bill) paid to employees of "TARP recipient" companies receiving "capital infusions" in excess of $5 billion (such excess to be reduced by repayments to the Federal Government) as provided in Section 1(c) of the bill.

On April 1, 2009, a bill (H.R. 1664) introduced by Representative Alan Grayson of Florida, passed the House. Among other provisions, the bill would amend EESA by prohibiting companies receiving TARP aid from paying compensation, other than compensation in the form of a longevity bonus or restricted stock, that is "unreasonable or excessive" or that "includes any bonus or other supplemental payment…that is not directly based on performance-based measures" (both sets of terms to be defined by the Treasury).

'Say on Pay'

"Say on Pay" has been part of shareholder advocates' proposals for a number of years. "Say on Pay," as that term is used here, gives to shareholders the opportunity to cast an annual advisory vote on executive compensation practices at the company in question.

The first company to adopt a policy giving shareholders an annual "Say on Pay" was Aflac. In 2007, the Board of Directors of Aflac adopted a "Say on Pay" policy and, in 2008, 93 percent of ballots cast by the shareholders of Aflac were voted in favor of the company's executive compensation practices for the top five executives.

As of the date this column was written, it appears that approximately 25 companies had adopted a "Say on Pay" policy giving shareholders an annual advisory vote on executive pay.[8] The Shareholder Bill of Rights Act of 2009, as noted above, would require public companies generally to provide their shareholders with "Say on Pay" opportunities.

Thus far, no U.S. company that has had an advisory vote pursuant to a "Say on Pay" policy has had a majority of that vote cast against the issuer's compensation practices.

Views in Washington

In the political environment today, executive pay is frequently portrayed as one of the key "villains" in the serious downturn in the economy. (Historically, executive pay has been a "whipping boy" for, among others, political figures and the media.) On Feb. 4, 2009, President Barack Obama was quoted as saying that his administration will "examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have helped to [wreak] havoc in our financial system. We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."

On March 24, 2009, Federal Reserve Chairman Ben Bernanke, appearing before the House Financial Services Committee, said, "It's very important that compensation links performance and reward appropriately and, in particular, does so in a way that does not incentivize excessive risk-taking." At that hearing, Representative Barney Frank, the committee's chairman, asked Mr. Bernanke, "[Do] You think [broader limitations on executive pay] should be done across the board with large financial institutions, whether or not they're receiving federal money?" Mr. Bernanke replied, "Yes, sir, I do."

On May 18, 2009, Treasury Secretary Timothy Geithner said, "I don't think our government should set caps on compensation." Previously, Mr. Geithner had said (at the March 24 hearing of the House Financial Services Committee noted above), "The government should not be setting detailed or prescribing detailed regulations to govern amounts of compensation and their distribution."

The foregoing quotations illustrate the difficulty in "reading" the real direction of Washington on executive pay at this point. Despite much "fire and brimstone" in the early part of 2009, there does not appear to be a very strong inclination in Washington to regulate generally the levels or the design of executive compensation. In fact, incentives, based on assuming risks and achieving results—both short-term and long-term—long have been, and presumably will long continue to be, recognized as appropriate tools in motivating and rewarding executives.

Part of the problem has been that political figures, as well as academics and journalists, have linked systemic executive compensation design with systemic risk management failures. The two do not necessarily correlate. In fact, there are many factors at work in our economy giving it a short-term, high-return focus, such as:

(a) the pressure exerted on management of U.S. corporations to produce short-term results because so many investors, especially institutional investors, are investing on a short-term basis; and

(b) the requirements of quarterly financial reports.

A further problem is the definition of "excessive risk." Nobody has provided a meaningful, generally applicable definition of "excessive risk." In fact, no one can, because risk is so much a factor of specific facts and circumstances. To cap or curtail incentives based on a generalization like "they encourage excessive risk" is to avoid the difficult issue: what is "excessive risk" in a specific situation?


Executive compensation is "feeling the effects" of the current serious economic downturn. Legislative and regulatory developments are putting executive pay under constraint and under scrutiny—principally at those companies in the financial services industry receiving TARP assistance. For public companies generally, it is likely that there will be expanded requirements as to disclosure of executive compensation, including underlying criteria, and widespread extension to shareholders of the right to vote on executive pay practices (at least on an advisory basis).

On the other hand, it is unlikely that federal regulations mandating the level and design of executive pay generally will happen in the foreseeable future. And once the current economy gets back on track, executive pay likely will return to its pattern of long-term growth in pay levels—a pattern that, according to available data, it has followed for over 50 years.


[1] Most of the financial services firms receiving TARP assistance have done so under TARP's Capital Purchase Program. A few companies, including a few outside the financial services industry, have received TARP aid under other TARP programs. AIG received assistance under the Systemically Significant Failing Institutions program. General Motors Corp., Chrysler LLC and their respective associated entities received aid under the Automotive Industry Financing Program and the Automotive Supplier Support Program. Also, several mortgage servicing companies have received TARP funds under the Home Affordable Modification Program. Each of these programs is, as noted, part of TARP.

[2] Studies indicate that the bulk of increases in CEO pay over the five decades from 1950 through 1999 occurred in the 1980s and 1990s. Based on survey data examined, during the 1980s CEO pay increased by approximately 170 percent (that is, if one started with an index of 100 at the beginning of the period (1980), the index would grow to 270 at the end of the period (Dec. 31, 1989)) and during the 1990s it increased by approximately 300 percent (again, meaning that an index of 100 at the beginning of the period (1990) would increase to 400 at the end of the period (Dec. 31, 1999)). For the 20-year period 1980 through 1999, this means an increase of approximately 980 percent (on an index of 100 at the beginning of the 20-year period (1980), the index would grow to 1,080 at the end of the period (Dec. 31, 1999)). Most of this increase is attributable to increase in value of equity-based plans (especially stock options). The increase in Total Direct Compensation (Salary, Bonus and Long-Term Incentives) during these two decades trailed the growth in the stock market, using the S&P 500 as the index, by approximately 25 percent. Based on a general examination of surveys for the period 2000 through 2008, it appears that Total Direct Compensation has increased by about one-half (approximately 50 percent). (As noted in the text, surveys for two of the years included in this period show decrease in pay levels from those of the prior year.)

[3] In addition to the provisions of EESA and ARRA, executive compensation regulations for TARP recipients were also contained in U.S. Treasury Guidance TG-15, issued on Feb. 4, 2009. As noted in the text, an Interim Final Rule titled "TARP Standards for Compensation and Corporate Governance" was issued at the time this column was submitted. The text does not contain a discussion of the Interim Final Rule. That Rule, as released June 10, 2009, indicates that it supersedes TG-15. (It does, however, embody some of the rules and principles contained in TG-15.)

[4] The original TARP participants were nine of the nation's largest banks, who signed on to accept TARP aid—reportedly at the insistence of then Treasury Secretary Henry Paulson—at the inception of the TARP program in October 2008. Since then, more than 600 banks (as well as several non-banks; see footnote 1) have received TARP assistance. These are the companies to which TARP's rules on bonuses, separation pay and other aspects of executive compensation apply. Some banks have repaid TARP aid, and others have announced their intention to do so, which is subject to the government's satisfaction that they can do so without jeopardizing their capital.

[5] There have been at least two predecessor bills to the "Shareholder Bill of Rights Act of 2009" noted in the text. In the 110th Session of Congress, "shareholder rights" bills were introduced by Representative Barney Frank in the House (H.R. 1257) and by then-Senator Barack Obama in the Senate (S. 1181). These bills contained provisions that correspond with certain provisions of the Schumer bill, but there are also significant new provisions in the current bill, including a requirement that the SEC establish rules allowing shareholder nomination of directors (for shareholders who own at least 1 percent of the issuer's securities); a requirement that the chairman be independent; a requirement that director elections be annual and not staggered; a requirement that directors be elected by majority vote; and a requirement that each issuer create a "risk committee" of independent directors to be responsible for risk management.

[6] Information required by the Durbin bill to be in the proxy statement includes, among other things, the total number of employees paid a multiple of 100 times the average employee's compensation, the total amount of compensation paid to such employees and, in addition, the compensation paid to the lowest paid employee and to the highest paid employee of the issuer and the average compensation paid to all employees of the issuer.

[7] Also, on Jan. 30, 2009, prior to the enactment of ARRA, Senator Claire McCaskill of Missouri introduced a bill (S. 360) that would cap compensation of any employee of a financial institution receiving TARP aid to the level of compensation of the President of the United States. (Presumably, the adoption of ARRA removed the likelihood that this bill will progress further.)

[8] The "approximately 25 companies" referred to in the text do not take into account the TARP recipients that will be adopting a "Say on Pay" policy pursuant to the new "Say on Pay" requirement of EESA §111(e). Section 111(e) was added by ARRA §7001, requiring companies receiving TARP bailouts to "permit" "Say on Pay" advisory votes by their shareholders.