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Senate Finance Committee Preparing Legislation on Executive Compensation

By Jim Hamilton

The leaders of the Senate Finance Committee set forth the principles for draft legislation designed to discourage excessive compensation at companies that have taken taxpayer funds, including executives at recipient institutions of TARP funds. The core principles are a federal excise tax on excessive compensation and a $1 million cap on deferred compensation. The draft will also include regulatory safeguards to prevent companies from characterizing bonus payments as salaries in an effort to avoid the tax. The principles were announced by Finance Chair Max Baucus and Ranking Member Charles Grassley. The excise and compensation cap will apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac

The principles provide that both companies and their individual executives must separately pay a 35% excise tax on all retention bonuses and all other bonuses over $50,000. If the excise tax cannot be collected from a foreign employee through normal withholding, then the company is responsible for paying the employee?s 35% excise tax amount. The draft will apply to all retention bonuses or other bonuses earned or paid beginning on 1/1/09 and continuing through the period during which the company retains TARP funds.

There would also be a $1 million limit on nonqualified deferred compensation, meaning that a taxpayer could not defer more than $1 million in a 12 month period The $1 million limit would be indexed for inflation If the $1 million limit is violated, compensation deferred under all nonqualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment.

Interest and earnings on compensation deferred during the 12-month period would not be counted against the $1 million limit, so long as the earnings are based on a market rate of return. While Treasury would be authorized to define a market rate of return, the Senators said that, in general, a market rate of return would mean a predetermined actual investment, which may include book value and a reasonable fixed rate of return.

The limit would apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac. In addition, it would apply to all compensation deferred after date of enactment and continuing through the period during which the company retains TARP funds.

Full post as published by Jim Hamilton's World of Securities Regulation on March 18, 2009 (boomark / email).