The United States Treasury Department has announced that firms participating in its rescue programs under the Emergency Economic Stabilization Act will be compelled to follow tougher tax rules governing executive compensation and adhere to stricter corporate governance standards surrounding executive pay in general.
The Treasury stated on Tuesday that it is issuing guidance for the executive compensation requirements that will apply to firms participating in the Troubled Asset Auction Program, one of three programms which forms part of the Wall Street bail out package.
Under the Stabilization Act, any financial institution that sells more than USD300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. The department is releasing Treasury Notice 2008-TAAP regarding this restriction.
In addition to this, financial institutions are prohibited from deducting executive compensation in excess of USD500,000 for each senior executive and certain golden parachute payments for tax purposes. Also, a 20% excise tax will be imposed on the senior executive for these golden parachute payments. The Treasury intends to release IRS Notice 2008-94 regarding these new tax rules.
These rules will also apply to financial institutions participating in the Capital Purchase Program, which also requires these firms to ensure that incentive compensation for senior executives does not encourage "unnecessary and excessive risks" that threaten the value of the financial institution. The Treasury is issuing interim final rules for these executive compensation standards.
A third program for 'Systemically Significant Failing Institutions' is still under development by the Treasury, but the department stated that similar levels of corporate governance will need to be observed by any firms that intend to benefit from it.
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