Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

Abstract

Our article examines proxy statement disclosures to gain insight about the role of the Special Master, the requirement of a risk analysis of compensation plans and the requirement of a provision for compensation clawbacks for firms receiving ‘exceptional assistance’ under the Emergency Economic Stabilization Act of 2008. We examine the only three firms – AIG, Citigroup and Bank of America – that both received exceptional assistance and provided 2010 proxy statements. We find that the Special Master, in his capacity of reviewing and approving compensation payouts and compensation structures as a government representative, mitigated the costs of TARP restrictions by using his discretion to override some restrictions, such as allowing cash compensation in excess of the $500 000 maximum. We also observe significantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after firms were required to analyze whether compensation plans motivate excessive risk-taking. All three firms appear to acknowledge concerns about their compensation plans, either explicitly by formally stating their concerns or implicitly by adopting new risk-related performance measures. In addition, we note that the amount of disclosure the three firms provide in responding to the same regulations differs significantly. Finally, we find that some firms adopted clawbacks beyond what is required, suggesting that firms find clawbacks beneficial in curbing excessive risk-taking. Our analysis of disclosures suggests that it would be useful for the SEC to review the resulting TARP disclosures as it determines whether such rules would be beneficial to impose on all firms.