Treasury's Compensation Principles

June 15, 2009

On June 10, 2009, the Treasury Secretary announced a broad-based set of principles for compensation practices that would apply to all regulated financial services institutions.  The principles are intended to align compensation practices with sound risk management and long-term growth of financial institutions.  Treasury intends these principles will evolve over time to meet its goal of "bringing compensation practices more tightly in line with the interests of shareholders and reinforcing the stability of firms and the financial system."  It is important to note that these principles apply to all financial institutions—not just those participating in the Troubled Asset Relief Program (TARP).  Moreover, these principles are broadly focused on the entire compensation scheme at institutions—not just executive compensation practices. 

Five key components of the principles were identified by the Treasury Secretary in a release at: http://www.ustreas.gov/press/releases/tg163.htm.

Key points of the principles include:

• Pay that ties compensation to performance by linking pay incentives to long-term value creation.  Performance based-pay would be conditioned on a wide range of metrics in addition to stock price to measure the firm's performance with its peers, as well as the performance of individuals and business units.
• Compensation structure for top executives should take into account long-term risks to the firm and shareholders by aligning compensation with the firm's long-term value and soundness.  Specifics are not prescribed, but stock options were suggested.  Firms are also encouraged to consider matching long-term risks with compensation incentives for employees involved with the design, sale, and packaging of financial products.
• Compensation practices should be aligned with sound firm risk management, including: (1) compensation committees conducting and publishing pay package risk assessments, and (2) enhancing the stature of risk managers as well as providing them with authority to impose checks on risky activities.
• Re-examining how golden parachutes and supplemental retirement packages align with shareholder interests, whether these benefits truly incentivize performance, and whether they reward top executives even when shareholders lose value.
• Promoting additional transparency and accountability in structuring firm compensation.  In this regard, the Administration will seek the enactment of legislation that would apply only to publicly-traded companies to: (1) authorize the SEC to require companies to give shareholders a non-binding "say on pay" vote on executive compensation packages, (2) empower the SEC to ensure the independence of compensation committees by imposing standards similar to the Sarbanes-Oxley standard for audit committees, and (3) give compensation committees the authority and  resources to hire independent compensation consultants and outside counsel that would report directly to the compensation committee.  Treasury issued related fact sheets today on "Providing Compensation Committees With New Independence" at: http://www.ustreas.gov/press/releases/reports/fact_sheet_indepcompcmte.pdf  and "Ensuring Investors Have a 'Say on Pay'" at: http://www.ustreas.gov/press/releases/reports/fact_sheet_say%20on%20pay.pdf.

The Secretary also highlighted current regulatory efforts by the Federal Reserve and bank supervisors to lay out broad compensation standards that will be "more fully integrated into the supervisory process" with a goal of ensuring that compensation practices do not create unnecessary risk.

What the principles do not include: