Recent Developments and Trends in Executive Pay for Financial Services Companies

Marjorie M. GloverDecember 17, 2009

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Special NoteThis Powerpoint presentation was presented at the ThompsonReuters conference on Recent Developments and Tends in Executive Compensation for Financial Services Companies on December 17, 2009

Provisions related to the Special Master for TARP Executive Compensation and related Advisory Opinions are set forth in a separate Powerpoint presentation prepared by co-panelist James Sillery of Buck Consultants

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TARP Timeline - 2008 In October 2008, the Treasury Department established the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008 (EESA) EESA was enacted to restore liquidity and

stability to the financial institutionsSection 111 of EESA set new “appropriate”

standards for executive pay and corporate governance including: incentive pay limits; clawbacks; and golden parachute prohibitions

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TARP Timeline - 2008 2008 EESA Guidance

October 2008 Interim Final Rule set original standards for Capital Purchase Program (CPP) recipients

Treasury Notice 2008-PSSFI set standards for “systematically significant failing institutions” including more rigid golden parachute restrictions

Treasury Notice 2008-TAAP prohibited any financial institution selling more than $300M in troubled assets through an auction program (Auction Sale TARP Recipients) from entering into new Senior Executive Officer (SEO) agreements with a golden parachute during length of program

IRS Notice 2008-94 required Auction Sale TARP Recipients to forego any deduction in excess of the $500,000 limit on executive pay under the new IRC Section 162(m)(5) and under limit on golden parachute deductions under the new IRC 280G(e)

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TARP Timeline - 2009 On February 4, 2009, Treasury issued new guidance on executive pay and corporate governance standards under EESAReporting, recordkeeping and disclosureAdditional restrictions on recipients of

“exceptional assistance” including: $500,000 pay cap (other than restricted stock and

long-term incentive arrangements) Restricted stock vesting requirements Expanded clawbacks Expanded golden parachute prohibitions Establishment of luxury expenditures policies Additional restrictions applied only to future grants

of TARP funds

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TARP TimelineOn February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enactedARRA significantly amended EESA provisions on

executive pay and corporate governanceUnlike the earlier February 2009 Treasury

guidance, ARRA applies to financial institutions that already received TARP funds

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TARP Timeline - 2009On June 10, 2009

Treasury announced the publication of an Interim Final Rule (IFR) under EESA as amended by ARRA IFR generally supersedes and consolidates all prior

guidance IFR became effective June 15, 2009

Treasury issued a statement regarding legislative proposals for executive pay for public companies

Treasury established the Office of Special Master for TARP Executive Compensation

The SEC announced it would propose expanded proxy disclosure requirements that will now take effect for the 2010 proxy season

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TARP Timeline - 2009 In June 2009

Treasury also issued Q&As on the IFR (that have been subsequently updated)

In July 2009The SEC issued proposed amendments to proxy rules to address say on pay votes for TARP recipients

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TARP TimelineOn October 22, 2009

Federal Reserve and Treasury issued statements on executive pay and corporate governance

Special Master issued first round of Advisory Opinions

On December 7, 2009Treasury issued technical corrections to the IFR

On December 11, 2009Treasury issued limited relief from IRC Section

409A for certain TARP recipient and their executives

Special Master issued second round of Advisory Opinions

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TARP Executive Pay andCorporate Governance Standards Governing Law - Section 111 of EESA as amended by ARRA and the

IFR

TARP Period – Any period in which TARP recipient owes money to the Federal government under TARP

Three Categories of Standards

Exceptional Assistance – large financial institution receiving funds over and above the Capital Purchase Program amount

CPP Recipients – Recipients that hold obligations under the Capital Purchase Program that provides direct capital infusion in financial institutions in exchange for senior preferred shares

Other Recipients – Recipients in other TARP programs (small business) that have no repayment or repurchase obligation

SEO – PEO, PFO and three most senior executives as determined under prior fiscal year’s SEC filings

Most Highly Paid Employees – determined based on prior fiscal year compensation and SEC filings

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TARP Executive Pay andCorporate Governance StandardsExecutive Pay

✓ General Pay Limits

✓ Bonus, Retention and Incentive Pay Limits

✓ Clawbacks

✓ Golden Parachute Prohibitions

✓ Tax Gross-Up Prohibitions

Corporate Governance

✓ Independent Compensation Committee

✓ Perquisite Disclosure

✓ Compensation Consultant Disclosure

✓ “Say on Pay” Vote

✓ PEO and PFO Certifications

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TARP Executive Pay StandardsGeneral Pay Limits

IRC Section 162(m)(5) Deduction Limit – Validates agreements of TARP recipients to forego deduction of pay in excess of $500,000 deduction limit

Excessive Risk Pay Limits – Prohibits incentives for SEOs to take unnecessary and excessive risks threatening TARP recipient’s value

Manipulative Pay Plan Limits – Prohibits compensation plans that would encourage manipulation of reported earnings to enhance compensation of employees

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TARP Executive Pay StandardsBonus, Retention and Incentive Pay Limits

Prohibits TARP recipients from paying or accruing any bonus, retention or incentive award to certain highly-paid employees or SEOs

Limits depend on amount of TARP assistance received

Exceptions - Long-term restricted stock and restricted

stock unitsBonuses paid under certain grandfathered

employment contracts

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TARP Executive Pay StandardsBonuses

Amounts Not Treated As Bonuses

Amounts Treated as Bonuses

Contributions and distributions from tax- qualified plans

Employer contributions and benefit increases to non-qualified plans

Benefits under broad-based plans and fringe benefits

Compensation for certain transactions (IPO or sale or acquisition)

Bona fide routine expense reimbursements

Loan forgiveness

Certain commissions (pre-2/17/09 plan, rate must be established, reasonable and applied consistently)

Commissions (other than permitted commissions)

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TARP Executive Pay StandardsLimit on Bonuses,

Retention and Incentive Pay

Amount of TARP Assistance

Covered Executives

Less than $25 million Most highly-paid employee

$25 million to less than $250 million

Five most highly-paid employees

$250 million to less than $500 million

SEOs and next 10 most highly-paid employees

$500 million or more SEOs and next 20 most highly-paid employees

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TARP Executive Pay StandardsExceptions: Long-Term Restricted Stock and RSUs

Prohibition does not apply to long-term restricted stock and RSUs as long as:the covered executive does not fully vest in the

restricted stock or RSU during the TARP period;the value of the restricted stock or RSU does

not exceed one-third of the covered executive’s annual compensation for the current fiscal year; and

the TARP recipient complies with such other restrictions as the Treasury may impose

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TARP Executive Pay StandardsExceptions: Grandfathered Employment Contracts

Prohibition does not apply to bonuses under written employment contract in effect as of February 11, 2009 and determined by the Treasury to be validException does not apply if contract is

subsequently amended to increase the amount payable, accelerate vesting or otherwise materially enhance the benefits available under the contract (other than amendments to reduce bonus amounts, add vesting criteria or add holding periods)

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TARP Executive Pay StandardsClawbacks

TARP recipients must recover or “clawback” bonus, retention and incentive compensation for the SEOs and the next 20 most highly-paid employees if compensation was based on materially

inaccurate financial statements (for example, earnings, revenue, gains or other criteria) or other materially inaccurate performance metric criteria

Facts and circumstances testRecovery is not necessary if it is deemed

unreasonable (generally if cost of recovery exceeds benefit of recovery)

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TARP Executive Pay StandardsGolden Parachute Prohibitions

Prohibits payment of golden parachute payments to the SEOs and any of the next 5 most highly-paid employees

For departure for any reason, except for payment for services performed or benefits accrued

Single trigger payments upon change of control also prohibited

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TARP Executive Pay StandardsTax Gross-Ups Prohibited

Prohibits any tax gross-ups to any of the SEOs and next 20 most highly-paid employees during the TARP period

Includes right to tax gross-up at a future date, for example a date after the TARP period ends

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TARP Executive Pay StandardsLuxury Expenditures

Board must establish a policy on luxury or excessive expenditures, including: entertainment or events; office and facility renovations; company-owned aircraft; and other transportation and similar activities or events

Within 90 days after closing date of TARP agreement or within 90 days after June 15, 2009, if later, board must: adopt excessive or luxury expenditures policy; provide policy to Treasury and primary regulatory

agency; and post policy on company website

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TARP Corporate Governance StandardsCompensation Committee Governance

TARP recipient must establish independent compensation committee within 90 days after closing date of TARP agreement or 90 days after June 15, 2009, if later

Independent compensation committee must meet at least semi-annually to discuss, evaluate and review with TARP recipient’s senior risk officer SEO compensation plans to make sure they do not take unnecessary and excessive risks that threaten value of TARP recipient or earnings manipulation

Report at least once per fiscal year on how plans comply with new standards

Certify completion of reviews

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TARP Corporate Governance StandardsPerquisites Disclosure

TARP recipient must disclose annually during TARP period any perquisite with a total value exceeding $25,000 during the fiscal year for each SEO and the most highly paid employees (as described in chart on page 14)

Must include narrative of amount and nature, recipient and justification for offering perquisite

Disclosure due within 120 days after completion of fiscal year during the TARP period

Must disclose to Treasury and primary regulatory agency

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TARP Corporate Governance StandardsCompensation Consultant Disclosure

TARP recipient must disclose annually whether TARP recipient or its board or compensation committee has engaged outside compensation consultant

Must include narrative of all types of services provided (including non-compensation related services) during last three years, including benchmarking or comparisons

Disclosure due within 120 days after completion of any fiscal year during the TARP period

Must disclose to Treasury and primary regulatory agency

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TARP Corporate Governance StandardsSay on Pay

TARP recipients must submit to shareholders for a non-binding advisory “say on pay” vote on executive pay

SEC issued guidance on annual say on pay requirements for TARP recipients in July 2009

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TARPCorporate Governance StandardsPEO and PFO Certifications

The principal executive officer and principal financial officer must certify compliance with the requirements noted above

For public companies, certification must be made to the SEC

For private companies, certification must be made to Treasury

Treasury provides model certifications in IFRSeparate models apply to first year

certifications and second year certifications

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TARPCorporate Governance StandardsTARP Fund Repayment

TARP recipients may repay TARP funds without replacing the repaid amount with other funds and without a waiting period

If the amounts are repaid, the restrictions on executive compensation described above generally cease to apply

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October 2009Federal Reserve Guidance October 22, 2009, Federal Reserve announced two

separate initiatives to provide supervisory review of bonus plans for all banking organizations supervised by Federal Reserve: 28 large complex banking organizations (LCBOs) Regional, community and other banking organizations After conclusion of 2010, Federal Reserve will prepare report on

trends and developments for bank executive pay plans

October 27, 2009, Federal Reserve Proposed Guidance on Sound Incentive Compensation Policies was published in Federal Register - Three principles: Provide employees incentives that do not encourage excessive

risk taking Be compatible with effective controls and risk management Be supported by strong corporate governance including active and

effective board oversight

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Notice 2009-92 Issued December 11, 2009 Provides relief under IRC Section 409A (409A) to

TARP recipients and their executives who comply with a Special Master Advisory Opinion that requires either:a change in the time or form of pay; orconditions payment upon a TARP-related condition

such as the prior repayment of some or all financial assistance will not violate 409A

Applies only to Advisory Opinions issued afterSeptember 30, 2009

Treasury and IRS intend to amend 409A regulations to incorporate guidance

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Notice 2009-92 Requirements for 409A Relief

Advisory Opinion must be addressed to TARP recipient and must specifically address compensation arrangement between TARP recipient and executive

TARP recipient must fully disclose to Special Master identity of any similarly situated executives and, to extent requested by Special Master, include those executives in the request for the Advisory Opinion For this purpose, SEO and next 20 executives will not be treated

as similarly situated to next 26 through 100 top executivesAdvisory Opinion must explicitly set forth a (1) revised

time and form of payment that would otherwise have complied with 409A, (2) condition or payment that is directly related to the financial assistance received by the TARP recipient to repay the TARP assistance or (3) combination of both (1) and (2)

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Notice 2009-92 Requirements for 409A Relief

Advisory Opinion must not permit the TARP recipient or executive to elect another time or form of payment other than in a manner compliant with 409A (the decision to repay some or all of the TARP assistance will not be treated as an election as to the time and form of payment)

The TARP recipient and executive must enter into a written agreement containing the revised time and form of payment and any applicable conditions on payment no later than end of executive’s tax year in which the Advisory Opinion is issued or the 15th day of the third month following the date the Advisory Opinion is issued, if later

TARP recipient and executive comply with the Advisory Opinion in all material respects

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Notice 2009-92 Relief from 409A

Failure to pay on the originally designated payment date will not be treated as an impermissible initial deferral election or subsequent deferral election under 409A

If Advisory Opinion requires a change in payment of an amount that otherwise qualifies as a short-term deferral under 409A to a time or form that would cause such amount to be treated as deferred compensation subject to 409A, the amount will be treated as deferred compensation under 409A once the change to the time and form of payment has been made Exception: If the Advisory Opinion requires only that the

payment of such amount be delayed until specified TARP-related conditions are met, and does not otherwise prescribe changes in the time and form of payment, such condition will not cause the amount to fail to qualify as a short-term deferral as long as the amount is paid at the earliest date at which the executive anticipates or reasonably anticipates that the payment would be permissible under the Advisory Opinion

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Notice 2009-92Relief from 409A

Early payments (payments before the original payment date) pursuant to the Advisory Opinion or EESA will be treated as permissible accelerations This includes early payments upon repayment of

TARP assistance

Once the TARP recipient and executive have agreed to the revised time and form of payment pursuant to the Advisory Opinion in writing, the revised time and form of payment is treated as the time and form of payment for purposes of determining future compliance with 409A