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Executive Brief 
The New Regulatory Imperative
A sweeping new regulatory framework is emerging as a result of the global financialcrisis, affecting many aspects of corporate operations, from finance and accounting,to risk management and compliance, to human resources (HR). The impendingchanges have the potential to make the U.S. Sarbanes-Oxley Act of 2002 looklike child’s play in comparison, especially since the current financial crisis is globalin nature. The main challenges facing HR leaders are in the understanding of thenew regulations, how they will impact their divisions and the broader business, andultimately, what organizational and technological changes will need to occur tobecome compliant.Governments across the globe are in the midst of defining their new frameworks,which will combine elements of legislative and regulatory reform. How deep andwide these changes will go remains unclear. Yet one thing is certain: Reformsare dictating that companies implement more uniform processes and systems forcompensation and performance, particularly in the areas of compliance reportingand auditing.The reason is that there is a distinct possibility that more than just financial servicescompanies – and more specifically, those 500+ companies
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that have so far receivedbailout funds as a part of the U.S. Emergency Economic Stabilization Act (EESA) of2008’s Troubled Asset Relief Program (TARP) – will be affected. The consequencesof this new regulatory imperative may have far broader ramifications, as reportedby
The New York Times
on March 21, 2009:“One proposal could impose greater requirements on company boards to tieexecutive compensation more closely to corporate performance and to takeother steps to ensure that compensation was aligned with the financialinterest of the company. The new rules will cover all financial institutions,including those not now covered by any pay rules because they are notreceiving federal bailout money. Officials say
the rules could also be appliedmore broadly to publicly traded companies,
which already report aboutsome executive pay practices to the Securities and Exchange Commission.”
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Executive Brief
Preparing HR LeadersFor A New Era of Regulation& Compliance: ExecutiveCompensation and A RenewedPay-For-Performance Mandate
April 2009
 
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Preparing HR Leaders For A New Era of Regulation & Compliance:Executive Compensation and A Renewed Pay-For-Performance Mandate
New rules and regulations are inevitable, and HR leaders need to begin preparingnow to minimize future operational disruptions. And given how much visibilityexecutive compensation practices have received thanks to the AIG bonus fiasco, HRleaders will need to be especially careful how they address this important and oftenradioactive issue within their companies.
A Synopsis Of The Last Six Months
H.R. 1424, an Act of Congress signed into law by President George W. Bush onOctober 3, 2008, created a $700 billion Troubled Asset Relief Program (TARP) underthe Emergency Economic Stabilization Act of 2008 (EESA), commonly referred toas the financial system bailout. More than 500 financial services companies (plus acouple of automakers and a notable insurance provider) in the U.S. have receivedTARP funds and are therefore subject to varying degrees of executive compensationregulation. Similar programs have been executed by governments across the globe.In the U.S., the executive compensation rules set forth in Section 111 of EESAestablish limits on compensation and rules for recovery (clawback) of compensationfor the five most highly-paid senior executives (including the principle executiveand financial officers) of companies that have received significant TARP funds. Thenew rules also limit senior executive tax deductions and prohibit golden parachutes.TARP eligibility and conditions vary based on whether the United States Departmentof the Treasury (Treasury) purchases troubled assets directly or through an auctionprocess.
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Subsequent interim final rules were issued by Treasury on January 16,2009, that primarily addressed certification and reporting requirements.
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 On February 4, 2009, Treasury issued new guidelines on executive compensation.
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These guidelines differentiate between companies needing access to the capitalaccess program (CAP) and those that require “exceptional” assistance (e.g., Bankof America, Citigroup, and AIG). Treasury also clarified compliance and certificationreporting requirements, and created limits on executive compensation of $500,000per year, not including restricted stock awards, for those companies in the“exceptional” category.Numerous other conditions were specified by Treasury on February 4, 2009, butperhaps most revealing was Treasury’s position on long-term regulatory reform.Treasury stated:“Even as we work to recover from current market events, it is not tooearly to begin a serious effort to both
examine how company-widecompensation strategies at financial institutions – not just thoserelated to top executives
– may have encouraged excessive risk-takingthat contributed to current market events and to begin developing modelcompensation policies for the future…The Secretary of the Treasury andthe Chairman of the Securities and Exchange Commission should worktogether to
require compensation committees of all public financialinstitutions – not just those receiving government assistance – toreview and disclose executive and certain employee compensationarrangements
and explain how these compensation arrangements areconsistent with promoting sound risk management and long-term valuecreation for their companies and their shareholders.”
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Preparing HR Leaders For A New Era of Regulation & Compliance:Executive Compensation and A Renewed Pay-For-Performance Mandate
Two points stand out in this Treasury statement:
Regulations may not be restricted to only top executives’
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compensation.
The financial crisis is calling into questioncompensation practices in general and sharpening the focus onmerit-based pay across many levels within an organization, not just executive management.
Regulations may extend beyond TARP recipients to all
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publically-traded companies.
Should the U.S. Securities andExchange Commission (SEC) be granted broad oversight ofexecutive compensation within all public companies, or at thevery least require improved compliance reporting and auditingpractices, the scope of regulatory change could be vast indeed.On February 17, 2009, President Barack Obama signed into law H.R. 1, TheAmerican Recovery and Reinvestment Act (ARRA) of 2009, commonly referredto as the stimulus bill. Title VII, Section 7001 of this Act explicitly amends EESASection 111’s executive compensation requirements. Applying to both existingand future TARP recipients, notable changes within Title VII include the recoveryof compensation paid (clawback) to the top twenty-five (vs. top five originally)most highly-paid executives in certain events. Updated bonus restrictions werealso established (based on the amount of TARP funds a recipient received), newcompliance reporting requirements were set forth, the creation of a compensationcommittee review board of independent directors was mandated, and a new“say-on-pay” provision enabling shareholders a non-binding vote on executivecompensation was established.
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 More recently, on March 26, 2009, Treasury announced its framework for regulatoryreform.
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The four primary components of the reform include addressing systematicrisk, protecting consumers and investors, eliminating gaps in the regulatory structure,and fostering international coordination. While executive compensation was notcalled out in this Treasury statement, the compensation issue remains front andcenter. The passing of a 90% tax on the AIG executives’ bonuses by the U.S. Houseof Representatives on March 19, 2009 was the first step, and largely political to stemrampant populist outrage. This was effectively replaced by a less punitive bill passedby the House on April 1, 2009 called “The Pay for Performance Act of 2009.”This new bill – which requires U.S. Senate approval before it can proceed – authorizesTreasury to “define what constitutes reasonable compensation, as well as to banbonuses not based on performance standards” for TARP recipients.
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Should this billbe passed by the Senate and signed into law by President Obama, it could have farreaching consequences on how HR organizations administer their performance andcompensation processes.There is one certainty HR leaders can bank on: The story is only just beginning.Regulatory reforms will not be isolated to the U.S. Indeed, the G20 meetings inLondon during the first week of April 2009 brought broad agreement on regulationsto mitigate the risk of a future global financial crisis. And due to public outrage,
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