Published ABA Banking journal  -  september 2011

Putting Together Pay Plans After TARP

By Susan O'Donnell and Jinyoon Chung

Financial institutions receiving funds from the Troubled Asset Relief Program faced special restrictions on a variety of common executive pay practices, including the use of bonuses, incentive programs and restricted stock, as well as stringent regulatory requirements for all companies related to risk assessment, clawback use and proxy disclosures.

As participants repay their TARP assistance and exit the program, many are taking a fresh look at their overall pay strategies and the mix and level of pay needed to meet their key objectives - a review process from which all companies can benefit. 

This article looks at some of the unintended consequences on pay programs that resulted from TARP restrictions, as well as new bank pay practices emerging in the post-TARP environment including:

• Recognition that some once-common practices could jeopardize shareholder support in Say on Pay votes.
• The need to provide shareholders with a clearly defined compensation philosophy
• More closely tying incentive rewards to actual risk horizons
• Intense scrutiny of executive retirement plans and perquisites
• Ongoing testing of programs to ensure levels are appropriate, aligned with meaningful results and meeting objectives
• A major focus on promoting and rewarding a longer-term performance perspective