Sunday, December 6, 2009

Dept. of Treasury Press Room Release: Executive Compensation Determinations for Top TARP Firms

October 22, 2009

The Special Master for TARP Executive Compensation Issues First Rulings

Today, the Special Master for TARP Executive Compensation Kenneth R. Feinberg released determinations on the compensation packages for the top executives at firms that received exceptional TARP assistance. Under the Emergency Economic Stabilization Act (EESA) as amended in 2009, the Special Master has a mandate to review all forms of compensation for five most senior executive officers and the next 20 most highly compensated employees at the seven firms that received exceptional TARP assistance (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial).

The determinations announced today for the top 25 most highly paid at the seven firms receiving exceptional assistance:

1. Reform Pay Practices for Top Executives to Align Compensation With Long-Term Value Creation and Financial Stability

· Reject cash bonuses based on short-term performance, as required by statute, in favor of company stock that must be held for the long term

· Restructure existing cash "guarantees" into stock that must be held for the long term

2. Significantly Reduces Compensation Across the Board

· Average cash compensation down by more than 90 percent

· Approved cash salary limited to $500,000 for more than 90 percent of relevant employees

· Average total compensation down by more than 50 percent

· Exceptions where necessary to retain talent and protect taxpayer interests

3. Require Salaries to Be Paid in Company Stock Held Stock Over the Long Term

· Stock is immediately vested, requiring executives to invest their own funds alongside taxpayers

· Stock may only be sold in one-third installments beginning in 2011--or, if earlier, when TARP is repaid--aligning executives' interests with those of taxpayers

4. Require Incentive Compensation to be Paid in the Form of Long Term Restricted Stock – and to be Contingent on Performance and on TARP Repayment

· Require executives to meet goals set in consultation with the Special Master, and certification of achievement of goals by an independent compensation committee

· Any incentives granted paid only in stock that requires three years of service and can be cashed in only when TARP is repaid

5. Require Immediate Reform of Practices Not Aligned with Shareholder and Taxpayer Interests

· Limits "other" compensation and perquisites

· No further accruals under supplemental executive retirement plans or severance plans

1. Reforms Pay Practices for Top Executives to Align Compensation Practices With Long-Term Value Creation and Financial Stability: The Special Master's rulings represent a fundamental transformation from the pay practices of the past. These decisions will significantly alter the way that executives covered by the Special Master's decisions--including the senior executive officers and next 20 most highly compensated employees of each of the seven recipients of "exceptional" assistance under the TARP (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial)--are paid.

· Rejects Cash Payments Based on Short-Term Performance, as required by statute: Traditionally, compensation for these employees has included large cash amounts, including significant cash bonuses. These payments gave executives incentives to take short-term risks and little reason to protect the long-term the health of the company or financial stability. After today's rulings, as required by statute and Treasury regulations, these executives will receive the overwhelming majority of their pay in company stock that may only be sold over the long term, aligning their interests with those of taxpayers and shareholders.

· Restructures Existing "Guaranteed" Cash Payments into Stock Held For the Long Term: Under the pay practices of the past, several executives in this group were awarded cash "guarantees" in 2009. Guaranteed minimum amounts give employees little downside risk in the event of poor performance--but upside when times are good. The Special Master required these agreements to be restructured. Under today's rulings, these amounts will be paid in company stock that must be held over the long term.

· Citigroup and Phibro: At Phibro, Citigroup's commodities trading unit, the Chief Executive Officer was to receive a significant cash bonus based on the short-term results of significant risk-taking. The Special Master rejected this approach, and Citigroup agreed to sell Phibro to a company that has not received taxpayer funds. Under today's ruling, nothing may be paid to the Phibro CEO until the sale is complete.

2. Significantly Reduces Compensation Across the Board: To break from the pay practices of the past, the Special Master has reduced compensation across the board--both in terms of cash and the total compensation executives will receive.

· On Average, Cash Compensation Decreased by More Than 90 percent: The Special Master rejected cash payments based on short-term results that may prove illusory, and cash guarantees that separate pay from performance. Overall, the Special Master reduced cash pay by more than 90 percent from 2008 levels--and, as required by Treasury regulations, cash bonuses may no longer be paid to any of these employees.

· Approved cash salary generally limited to $500,000: Consistent with the Administration's February 4 guidance on executive compensation at TARP recipients, the Special Master approved base salaries of $500,000 or less for more than 90 percent of the employees in this group. Base salaries greater than $1 million were approved in just three cases: for the new CEO of AIG, as previously announced, and for two employees of Chrysler Financial, which will wind down its operations in the near term and cannot grant employees long-term incentives.

· On Average, Total Compensation Decreased by More Than 50 percent: Even including the value of stock that must be held for the long term, the Special Master reduced the total compensation packages for executives in this group to less than half of 2008 levels.

· Exceptions Where Necessary to Retain Talent and Protect Taxpayer Interests: Although the Special Master's rulings generally emphasize decreases in both cash and total compensation across the seven companies, increases in compensation were permitted where shown to be necessary to retaining key talent critical to a company's long-term success--and, ultimately, ability to repay the taxpayer.

3. Requires Salaries to be Paid in Company Stock Held Over the Long Term: The Special Master's rulings fundamentally change the structure of compensation at these firms. Rather than cash, today's rulings require that the majority of salaries be paid in stock that must be held for the long term--giving executives incentives to pursue long-term value creation and financial stability.

· Stock is Immediately Vested, Requiring Executives to Put Their Own Funds at Stake: Rather than just cash, executives will earn base salaries in the form of vested stock in their companies. In effect, the Special Master is requiring each executive to invest their base salary in the long-term future of the firm, alongside taxpayers. These structures ensure that executives do not have incentives to take the excessive risks that contributed to the financial crisis.

· Stock May Only Be Sold in One-Third Installments, Beginning in Two Years: Unlike the pay practices of the past, which allowed executives to sell stock in their companies immediately, the Special Master's rulings require stock to be held for the long term. Stock received as salary may only be sold in one-third installments that will not begin until 2011, unless the taxpayer is repaid earlier.

4. Require Incentive Compensation to be Paid in the Form of Long Term Restricted Stock – and to be Contingent on Performance and on TARP Repayment: As the Secretary noted in his June 10 statement, incentive pay can be undermined by compensation practices that set the performance bar too low or simply reward rising tides. The Special Master's rulings require that incentives be paid only if executives reach objective goals agreed upon in consultation with the Special Master--and only if TARP is repaid.

· Requires Achievement of Goals Set in Consultation with the Special Master: The Special Master's rulings permit these executives to receive incentive pay only if the executives attain objective, predetermined performance goals set in consultation with the Special Master. Achievement of these goals must be certified by each company's compensation committee--which, under Treasury regulations, must be composed solely of directors fully independent from management.

· Requires Three Years of Service, and TARP Repaid, Before Payment: To ensure that taxpayers continue to receive the benefits of the executives' talents, the Special Master's ruling requires that any incentive awards be paid only if the employee provides at least three years of service to the company after the award is made. And, under Treasury regulations, the awards must be paid in the form of restricted stock that may not be paid unless the company repays its TARP obligations.

5. Requires Immediate Reform of Practices Not Aligned With Shareholder Interests: As the Secretary noted in his June 10 statement, in some cases golden parachutes and supplemental executive retirement plans have expanded beyond their original purpose, and may not enhance the long-term value of the firm or allow shareholders to easily ascertain the full value of the "walkaway" pay an executive will receive when departing the firm. The Special Master's rulings place tough new restrictions on these payments--as well as perquisites and other personal benefits--for executives at companies that have received exceptional taxpayer assistance.

· Caps perquisites and "other" compensation: Several experts, including the Conference Board Task Force on Executive Compensation, have concluded that executives--and not companies--should generally cover the costs of personal expenses. The Special Master's rulings generally cap these types of payments at $25,000, with limited exceptions for unusual circumstances that can be justified to the Special Master.

· Additional limitations on "golden parachute" payments: Large "golden parachute" or severance payments often serve to enrich executives rather than provide reasonable compensation during unemployment, and often do not enhance the long-term value of a company. Tough new Treasury regulations prohibit these payments to the senior executive officers and five most highly compensated employees at all companies that have received taxpayer assistance. The Special Master's rulings go further, however, and prohibit companies from increasing the amount of any "golden parachute" payable to any of the top 20 most highly compensated executives during 2009.

· Freezing supplemental executive retirement plans: Supplemental executive retirement benefits can provide substantial cash guarantees to departing executives, regardless of performance. And, as the Secretary noted on June 10, these complex benefits can make it difficult for shareholders--and, in the case of exceptional assistance companies, taxpayers--to ascertain the full amount of pay an executive will receive upon retirement. The Special Master's rulings conclude that that executives should provide for their retirements with wealth based on performance while they are employed, rather than being guaranteed substantial retirement benefits beyond those provided to everyday workers. As a result, the Special Master's decisions prohibit additional accruals under supplemental executive pension programs and company credits to other non-qualified deferred compensation plans following the release of today's rulings.


* Executive Compensation Determinations for Top TARP Recipients

Thursday, November 26, 2009

Employee Benefits: Hot Practice

Originally published in Student Lawyer , December 2002
(Vol. 31, No. 4)

Hot Practice


Employee benefits lawyers protect the interests of workers and their employers

If you haven’t thought much about employee benefits law, think about this: legions of Enron workers who watched their retirement savings go up in smoke. The practice may seem low profile, but the issues make front-page news.

One acronym sums up employee benefits law—ERISA. These five letters stand for the Employee Retirement Income Security Act of 1974, the federal statute that is the bible for lawyers who approach the specialty from every conceivable angle. The law comes into play if an employer offers employee benefits such as health insurance, pension plans, life insurance, and severance packages.

Employee benefits lawyers say their field offers lots of variety and personal satisfaction. The specialty covers transactional as well as litigation aspects of practice. It provides opportunities to represent workers as well as their employers.

“It’s a fun area,” says Nell Hennessy, chair of the ABA Section of Business Law’s employee benefits and executive compensation committee. “The law changes once a year or sometimes more than once a year.”

Hennessy outlines ERISA’s most relevant aspects as follows. One aspect involves issues such as employer disclosure requirements and fiduciary responsibilities, along with remedies available for violations of the law. Another element of ERISA sets the minimum requirements pension plans must adhere to in order to receive favorable tax treatment. Finally, the statute establishes rules that govern what an employer must pay if it terminates or withdraws from a plan. It also covers the contingencies that arise in the event of an employer’s bankruptcy.

Hennessy, president of Aon Fiduciary Counselors Inc. in Washington, D.C., says her work has touched on all of these broad areas. Even for those lawyers with a pure tax law or securities law practice, she says, ERISA issues are likely to arise. For example, Hennessy points out that more than a quarter of all U.S. stock is held by private and public pension plans, which are governed, of course, by ERISA.

How do lawyers divvy themselves up among the various aspects of employee benefits law? For the most part, there are distinct litigation and transactional sides of the practice. The same generally applies to the employer-employee sides of the fence.

The good news for those seeking employee benefits work is that most large firms have a practice section devoted to the field. Some boutique firms focus on ERISA work as well.

Most firms are likely to represent employers, but AARP senior staff attorney Mary Ellen Signorille says lawyers can develop a plaintiff-side (i.e., employee-focused) practice with a strong investment of diligence and patience. “People have done it and done it successfully,” says Signorille, co-chair of the employee benefits committee of the ABA Section of Labor and Employment Law.

Even while in law school, aspiring employee benefits lawyers can take advantage of the fact that ERISA law changes frequently. Students can make an effort now to keep abreast of new developments and market themselves as having cutting-edge knowledge of where the law is going, says Washington, D.C., lawyer David Levin, Signorille’s co-chair. Levin points to new privacy regulations governing employee health information as a good example of an area students can dive into now. “The regulations are huge,” he says. “It’s like a book.”

Where the jobs are

Levin advises that students look for job opportunities in the field with governmental entities that handle insurance, labor, or tax issues. At the state level, he says, students can identify the governmental unit that oversees the insurance industry. And at the federal level, students can look into regional or local offices affiliated with either the U.S. Department of Labor or the Internal Revenue Service.

Another angle of employee benefits law is taxation, which Phoenix lawyer Thomas Hoecker finds personally rewarding. The practice “offers an opportunity to help structure programs that benefit the employee and the employer,” says Hoecker, chair of the ABA Section of Taxation’s employee benefits committee. He points out that companies seek favorable tax treatment and need to make sure they’re in step with ERISA requirements to do so.

If you’re not comfortable dealing with tax issues at least some of the time, ERISA might not be for you, says Philadelphia lawyer Robert Abramowitz, chair of the ABA Health Law Section’s employee benefits and executive compensation committee. What he likes about his practice is that the client’s goal is clear: providing benefits to workers within the company’s fiscal parameters. Abramowitz represents mostly employers, including governmental agencies and nonprofit organizations such as hospitals and health systems.

By contrast, C. Mark Humbert doesn’t approach employee benefits issues from the “ERISA guru” perspective characteristic of tax practitioners. “My particular niche really is litigation,” says Humbert, who chairs the employee benefits committee of the ABA Tort Trial and Insurance Practice Section. The Walnut Creek, Calif., lawyer advocates on behalf of insurers and other plan-related entities.

New York lawyer Gloria Nusbacher, the Business Law Section’s representative to the ABA Joint Committee on Employee Benefits, is drawn to the executive compensation and securities law aspects of the practice. Part of the challenge comes from trying to parse the requirements of a host of laws and regulations in addition to ERISA, such as federal securities law.

A big issue today, she says, is whether corporate compensation committees are rubber stamping rather than scrutinizing executive compensation packages, some of which provide homes and huge stock deals to high-level corporate officers. Part of her work is to advise compensation committees on such matters.

Even if employee benefits law and its leading acronym aren’t on your personal radar screen, know that it’s something with a market. As Abramowitz says, “Virtually every firm that does corporate work needs to either have ERISA capability or an arrangement with a firm that has ERISA capability.”

Lisa Stansky ( is a lawyer and freelance writer in New Orleans.

Resources on Employee Benefits Law

A good place to begin is the Joint Committee on Employee Benefits (, which coordinates the activities of the employee benefits committees of six ABA sections. Visit the web sites of each section to learn about practice-related developments, educational and networking opportunities, activities for law students, and other membership benefits.

The Section of Business Law ( has a committee on employee benefits and executive compensation. Section members receive a subscription to The Business Lawyer, a student-edited law journal, and Business Law Today, the section magazine. Membership is free for law students.

The Health Law Section ( has a committee on employee benefits and executive compensation. Students can join the section for $10 and receive a subscription to The Health Lawyer.

The Section of Labor and Employment Law ( has an employee benefits committee. Section membership is $3 a year for law students and provides subscriptions to The Labor Lawyer and The Labor and Employment Law Newsletter.

The Section of Real Property, Probate, and Trust Law ( has a series of committees under the rubric of “employee benefit plans and other compensation arrangements.” Students can join the section for $5 and receive Probate and Property magazine and Real Property, Probate, and Trust Journal.

The Section of Taxation ( has an employee benefits committee. A $6 annual section membership for law students provides subscriptions to The Tax Lawyer journal, The State and Local Tax Lawyer journal, and the section newsletter.

The Tort Trial and Insurance Practice Section ( has an employee benefits committee. Students can join TIPS for free and receive three periodicals: the Tort and Insurance Law Journal, The Brief, and The Source.

Monday, November 16, 2009

Not All Plan Failures are Created Equal: Inventing the Code §409A Correction Program

2008 Winner of the Paul Faherty Tax Law Writing Competition


In March of 2008, Bear Stearns proved once again that no corporation is impervious to a financial collapse. Bear Stearns suffered an old-fashioned bank run when liquidity issues rendered it unable to meet creditor demands. This situation forced Bear Stearns to arrange a deal with JPMorgan Chase and the Federal Reserve Bank for financing. On the day this arrangement was announced, Bear Stearns’ stock plummeted 47 percent, closing at $30 per share. A few days later, Bear Stearns was sold to JPMorgan Chase for $2 per share. In less than 100 hours, Bear Stearns stock fell from $67 per share to $2 per share. For a company 30 percent employee-owned, the executives took action to salvage some value for their employees.

The Bear Stearns collapse can properly be characterized as an “Enron situation.” Bear Stearns was like Enron because the executives knew of the Company’s impending demise but failed to alarm the public or its shareholders. But Bear Stearns was different from Enron in an important way. Bear Stearns’ executives could not accelerate distributions from their non-qualified deferred compensation plans before its collapse without harsh penalties.

A few years before Bear Stearns collapsed, the fraudulent conduct of Enron executives brought to light how executives abused the Internal Revenue Code’s (the “Code”) deferred compensation principles. Enron executives accelerated distributions from their non-qualified deferred compensation plans, while the rank and file employees lost their retirement funds,which were invested in Enron when it went bankrupt.14 In contrast, Bear Stearns’ President and Chief Executive Officer Alan Schwartz reportedly lost $115.7 million dollars in the value of his holdings in company stock.

In the wake of Enron and before Bear Stearns’ collapse, Congress added Code §409A as part of the American Jobs Creation Act of 200416 in an effort to correct the system. The new requirements under Code §409A have created compliance issues for executives and their corporations. All non-qualified deferred compensation plans must comply with the requirements under Code §409A(a) in form and in operation. The esoteric nature of Code §409A(a) and its regulations make administration difficult. Consequently, the U.S. Department of the Treasury (the “Treasury Department”) and the Internal Revenue Service (the “Service”) have decided to create a program for correcting certain non-qualified deferred compensation plan failures.

Instituting a correction program for employee benefit plan failures is not a new concept.For several years, the Service has administered the Employee Plans Compliance Resolution System (“EPCRS”) to allow a plan qualified under Code §401(a) to correct certain failures that would otherwise cause the plan to be disqualified. While the current EPCRS program has undergone several reconstructions, the current Code §409A(a) correction program is in its infant stage. On December 20, 2007, the Treasury Department and the Service released Notice 2007-100 outlining a limited self-correction program.

This article reviews the current Code §409A(a) correction program and analyzes several issues related to creating the program, including whether the Treasury Department and the Service have legal authority to create it. The first section of this article discusses the history of Code §409A(a) and its requirements.

The second section reviews Notice 2007-100 and provides an analysis of several issues related to the Notice. The third section reviews a few authoritative and administrative issues related to the development of the Code §409A(a) correction program. The fourth section suggests measures that should accompany the creation of an effective correction program under Code §409A(a). The fifth and final section provides concluding thoughts on the issues discussed in this article.

CLICK HERE for full article