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 fi rms receiving ' exceptional assistance ' under the Emergency Economic Stabilization Act of 2008. We examine the only three fi rms -AIG, Citigroup and Bank of America -that both received exceptional assistance and provided 2010 proxy statements. We fi nd 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 signifi cantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after fi rms were required to analyze whether compensation plans motivate excessive risk-taking. All three fi rms 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 fi rms provide in responding to the same regulations differs signifi cantly. Finally, we fi nd that some fi rms adopted