Executive Compensation Limits in Selected
Federal Laws
Michael V. Seitzinger
Legislative Attorney
Carol A. Pettit
Legislative Attorney
April 22, 2009
Congressional Research Service
7-5700
www.crs.gov
R40540
CRS Report for Congress
P
repared for Members and Committees of Congress

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Executive Compensation Limits in Selected Federal Laws

Summary
Concern about shareholder value, corporate governance, and the economic and social impact of
escalating pay for corporate executives has led to controversy regarding the practices of paying
these executives. This report focuses on legal provisions related to tax, bankruptcy, and corporate
governance that attempt to limit executive compensation. Many provisions have existed for a
number of years, but some have a more recent origin in the 110th and 111th Congresses.
In the 110th Congress, two laws containing executive compensation provisions were enacted: P.L.
110-289, the Housing and Economic Recovery Act of 2008 (HERA), and P.L. 110-343, the
Emergency Economic Stabilization Act of 2008 (EESA). In the 111th Congress, H.R. 1, the
American Recovery and Reinvestment Act of 2009 (ARRA), became law (P.L. 111-5). Title VII
of ARRA sets forth restrictions on the compensation of executives of companies during the period
in which any obligation arising from financial assistance provided under the Troubled Assets
Relief Program (TARP) remains outstanding and requires standards and a review board to
determine appropriate executive compensation, which must be voted on by shareholders of TARP
recipients.
In the wake of AIG’s bonus announcement, several bills (H.R. 1575, H.R. 1586, H.R. 1664, and
S. 651) were introduced in the 111th Congress to recover, directly or indirectly, bonuses paid by
TARP recipients and to discourage future bonus payments. Other bills have also been introduced
in the recent Congresses concerning limiting executive compensation. These bills include
proposals to modify the corporate governance provisions as well as the Bankruptcy and Internal
Revenue Codes.
This report includes, as an appendix, a table outlining a number of statutory provisions that limit
executive compensation.
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Executive Compensation Limits in Selected Federal Laws

Contents
Corporate Governance ................................................................................................................ 1
SEC Revision of Executive Compensation Rules in 2006 ...................................................... 1
Recently Enacted Legislation ................................................................................................ 3
Executive Compensation Limits in the Internal Revenue Code .................................................... 5
Limitations on Deductibility of Amounts Paid for Employee Compensation .......................... 5
Corporations Not Receiving TARP Funds........................................................................ 5
Entities Receiving TARP Funds....................................................................................... 6
Limitations on Excess Golden Parachute Payments ............................................................... 6
Excise Tax ...................................................................................................................... 7
Denial of Tax Deduction for Excess Parachute Payments................................................. 7
Corporations Not Receiving TARP Funds.................................................................. 7
Entities Receiving TARP Funds................................................................................. 7
Executive Compensation Limits in the Bankruptcy Code............................................................. 8
Congressional Proposals ............................................................................................................. 9
Disclosure Proposals ........................................................................................................... 10
Proposals to Impose Limitations on TARP Recipients.......................................................... 10
Tax Proposals...................................................................................................................... 11
Bankruptcy Proposals.......................................................................................................... 11

Tables
Table A-1. Selected Provisions in Current Federal Law ............................................................. 13

Appendixes
Appendix. ................................................................................................................................. 13

Contacts
Author Contact Information ...................................................................................................... 16

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Executive Compensation Limits in Selected Federal Laws

Corporate Governance1
Concern about shareholder value, corporate governance, and the economic and social impact of
escalating pay for corporate executives has led to a controversy regarding the practices of paying
these executives. In a stated attempt “to provide investors with a clearer and more complete
picture of compensation to principal executive officers, principal financial officers [and] the other
highest paid executive officers and directors,”2 the Securities and Exchange Commission (SEC or
Commission) issued rules in 2006 concerning the disclosure of executive compensation. The
rules, however, have created a controversy of their own. Separate from the SEC, Congress has
also examined ways to address concerns relating to executive compensation. Both the 110th and
111th Congresses enacted significant legislation with executive compensation provisions.
SEC Revision of Executive Compensation Rules in 2006
On July 26, 2006, the SEC voted to adopt revisions to its rules concerning disclosure of executive
compensation.3 These compensation disclosure rules were particularly focused upon companies’
providing investors with details about executives’ stock-option grants and corporate stock-option
programs. The rules required companies to prepare a principles-based Compensation Discussion
and Analysis section in their proxy statements, annual reports, and registration statements.4
In these July 26 rules, the Commission required companies “to make tabular and narrative
disclosure about all aspects of stock option grants and ... provid[e] additional guidance about the
disclosure of company stock-option practices.”5 The tables would have to contain such
information as the grant date fair value, the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards Rule No. 123 (FAS 123R) grant date, the closing
market price on the grant date if the closing market price is greater than the exercise price of the
award, and the date on which the board of directors or the compensation committee took action to
grant the award if the action date is different from the grant date.
On December 22, 2006, the Commission announced that it had adopted changes to its July 26
executive and director compensation disclosure rules “to more closely conform the reporting of
stock and option awards to Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R).” The
amendment was made in the form of interim final rules that would become effective upon
publication in the Federal Register.6 The Commission went on to state that
FAS 123R requires recognition of the costs of equity awards over the period in which an
employee is required to provide service in exchange for the award. Using this same approach
in the executive compensation disclosure will give investors a better idea of the

1 This section was written by Michael V. Seitzinger.
2 71 Fed. Reg. 78,338, 78,339 (December 29, 2006).
3 71 Fed. Reg. 53,158 (September 8, 2006), amending 17 C.F.R. Parts 228, 229, 232, 239, 240, 245, 249, and 274.
4 71 Fed. Reg. 53,158, 53,164 (September 8, 2006).
5 BNA, Daily Report for Executives, July 28, 2006, at G-7.
6 The interim final rules were published in the December 29, 2006, Federal Register at 71 Fed. Reg. 78,338.
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compensation earned by an executive or director during a particular reporting period,
consistent with the principles underlying the financial disclosure statement.7
The SEC briefly summarized some of the important provisions of the amendment as follows:
The dollar values required to be reported in the Stock Awards and Option Awards columns
of the Summary Compensation Table and the Director Compensation Table are revised to
disclose the compensation cost of those awards, before reflecting forfeitures, over the
requisite service period, as described in FAS 123R. Forfeitures are required to be described
in accompanying footnotes.
The Grants of Plan-Based Awards Table is revised to require disclosure of the grant date fair
value of each individual equity award, computed in accordance with FAS 123R, and the
Director Compensation Table required under Item 402 of Regulation S-K is revised to
require footnote disclosure of the same information.
The Grants of Plan-Based Awards Table is revised to require disclosure of any option or
stock appreciation right that was re-priced or otherwise materially modified during the last
completed fiscal year, including the incremental fair value, computed as of the re-pricing or
modification date in accordance with FAS 123R, and the Director Compensation Table
required under Item 402 of Regulation S-K is revised to require footnote disclosure of the
same incremental fair value information.8
These December 22 amendments have resulted in criticism by some investor groups. Investor
groups’ criticism has focused on what they believe to be the obfuscation of executive pay
packages. An example given is the following:
Say the chief executive of American Widget gets a $24 million option grant on December 1
of this year, with the options vesting—meaning they may be exercised—over four years. He
is not eligible for retirement, perhaps because he joined the company only a few years ago,
or perhaps because he has not reached the company’s minimum retirement age of 60.
In the summary table, the value of that option will be shown as $500,000. That is because he
has worked just one month of the 48 months needed for the option to become fully
exercisable.
Over at National Widget, American’s main competitor, the chief executive gets an inferior
options package on the same day. It is worth $5 million, with the same four-year schedule.
But that executive is eligible to retire, although he has no intention of doing so. The
compensation summary will show he got a $5 million option.
The reality is that one man received options worth nearly five times what the other one was
awarded. The appearance is very different.9
On the other hand, some business groups claimed that the executive compensation disclosure
requirements as originally proposed by the SEC needed to be revised because they did not
provide a completely accurate picture of actual annual executive compensation.10

7 Id.
8 http://sec.gov/news/press/2006/2006-219.htm.
9 Floyd Norris, “Does S.E.C. Know What It Is Doing?” New York Times, December 29, 2006, at C1.
10 See, e.g., comments submitted to the SEC by Steve Odland, Chairman and CEO, Office Depot, Inc., and Chairman,
(continued...)
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Recently Enacted Legislation
In the 110th Congress, two laws containing executive compensation provisions applicable to
executives of specific types of businesses were enacted: P.L. 110-289, the Housing and Economic
Recovery Act of 2008, and P.L. 110-343, the Emergency Economic Stabilization Act of 2008.
Sections of P.L. 110-289 concern restrictions on compensation for executives of federal home
loan banks, Fannie Mae, and Freddie Mac. Section 1117 allows the Secretary of the Treasury, in
exercising temporary authority to purchase obligations issued by any federal home loan bank,
Fannie Mae, and Freddie Mac, to consider limitations on the payment of executive compensation.
Sections 1113 and 1114 allow the Director of the Federal Housing Finance Agency to prohibit and
withhold executive compensation from executives of federal home loan banks, Fannie Mae, and
Freddie Mac if wrongdoing has occurred. There is also authority for limiting golden parachute
payments to these executives.
Section 111 of P.L. 110-343 allowed the Secretary of the Treasury to require that financial
institutions whose troubled assets are purchased meet appropriate standards for executive
compensation. These standards were required to include limits on incentive-based compensation
for unnecessary and excessive risks, recovery of bonuses and incentive compensation based on
criteria later proven to be materially inaccurate, and a prohibition on golden parachutes.
In the 111th Congress, Title VII of P.L. 111-5, the American Recovery and Reinvestment Act of
2009, amended Section 111 of P.L. 110-343 to set forth somewhat different and more detailed
restrictions on the compensation of executives of companies during the period in which any
obligation arising from financial assistance provided under the Troubled Assets Relief Program
(TARP) remains outstanding. The Secretary of the Treasury is required to develop appropriate
standards for executive compensation. The standards must include the following:
• Limits on compensation that exclude incentives for the five highest paid
executives of the TARP recipient to take unnecessary and excessive risks.
• A provision for the recovery by the TARP recipient of any bonus, retention
award, or incentive compensation paid to the five highest paid executives and the
next 20 most highly compensated employees of the TARP recipient, based upon
criteria that are later found to be materially inaccurate.
• A prohibition on the TARP recipient’s making any golden parachute payment to
the five highest paid executives or any of the next five highest paid employees of
the TARP recipient.
• A prohibition on a TARP recipient’s paying a bonus, retention award, or incentive
compensation, except that the prohibition shall not apply to paying long-term
restricted stock, so long as this stock does not fully vest during the period in
which the TARP recipient has outstanding financial assistance, has a value not
greater than one-third of the total amount of the annual compensation of the
employee receiving the stock, and is subject to other conditions that the Secretary
of the Treasury may determine to be in the public interest. The prohibition is not

(...continued)
Corporate Governance Task Force, Business Roundtable, Washington, DC (April 10, 2006).
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to be construed to apply to a bonus payment required to be paid according to a
written employment contract executed on or before February 11, 2009.
Application of the prohibition is dependent upon the amount of assistance
received. The prohibition applies as follows:
• to the highest paid person of a financial institution receiving less than $25
million in financial assistance,
• to at least the five highest paid employees of a financial institution receiving
at least $25 million but less than $250 million in financial assistance,
• to the five highest paid executive officers and at least the next 10 highest paid
employees of a financial institution receiving at least $250 million but less
than $500 million, and
• for a financial institution receiving financial assistance of $500 million or
more, to the five highest paid officers and at least the next 20 highest paid
employees.
• A prohibition on any compensation plan encouraging manipulation of the
reported earnings of a TARP recipient to enhance the compensation of any of its
employees.
• A requirement for the establishment of a Board Compensation Committee.
The chief executive officer and the chief financial officer of each TARP recipient must certify that
the TARP recipient has complied with the standards issued by the Secretary of the Treasury and
file the certification with the Securities and Exchange Commission if the company’s securities are
publicly traded or with the Secretary of the Treasury if the company’s securities are not publicly
traded.
The Board Compensation Committee which each TARP recipient is required to establish must be
made up of independent directors and must review employee compensation plans. The Board
must meet at least semiannually to discuss and evaluate employee compensation plans. If the
TARP recipient’s stock is not registered with the SEC and it has received $25 million or less of
TARP assistance, the Board Compensation Committee’s duties shall be performed by the
recipient’s board of directors.
The board of directors of each TARP recipient must have a policy concerning excessive or luxury
expenses, including entertainment, office renovations, transportation services, and other
unreasonable expenditures.
Any annual or other meeting of the shareholders of a TARP recipient must permit a separate
shareholder vote to approve the compensation of executives. The vote shall be nonbinding and
cannot be construed to overrule a decision by the board of directors.
The Secretary of the Treasury is required to review bonuses, retention awards, and other
compensation paid to the five highest paid executives and the next 20 highest paid employees of
each company that received TARP assistance before February 17, 2009 (the act’s date of
enactment), to determine whether any payments were inconsistent with the purposes of TARP or
contrary to the public interest. Payments determined to be excessive shall be reimbursed to the
federal government.
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In consultation with the appropriate federal banking agency, the Secretary of the Treasury shall
permit a TARP recipient to repay any assistance provided to the financial institution, without
regard to whether the financial institution has replaced the funds from any other source or to any
waiting period. When the assistance is repaid, the Secretary of the Treasury shall liquidate
warrants associated with the assistance at the current market price.
Executive Compensation Limits in the Internal
Revenue Code11
In tax law, executive compensation is limited by either denying the payer a deduction for a
payment to an executive or by imposing a tax on either the payer or the payee. The former is used
as a means of limiting salary deductions. Both are used to limit “golden parachutes.”
Provisions to limit executive compensation, including golden parachute payments, have existed
within the Internal Revenue Code (IRC) for many years;12 however, new provisions affecting
entities receiving funds from the Troubled Assets Relief Program (TARP) were introduced in the
110th Congress by the Emergency Economic Stabilization Act of 2008 (EESA).13 These
provisions have some similarities to the earlier provisions in the code, but differ sufficiently that
the EESA provisions will be described separately from the earlier provisions, which are still in
effect for publicly held corporations that have not received TARP funds. EESA and the American
Recovery and Reinvestment Act of 2009 (ARRA)14 also introduced restrictions outside of the IRC
on golden parachute payments. These are discussed in the corporate governance section of this
report.
Limitations on Deductibility of Amounts Paid for Employee
Compensation
Corporations Not Receiving TARP Funds
In 1993, subsection 162(m) was introduced into the IRC. Effective for tax years beginning after
December 31, 1993, the provision applied only to publicly held corporations15 and not to closely
held corporations or non-corporate employers. With the exception of employers receiving TARP
funds, the § 162(m) limitations on deductibility continue to apply only to publicly held
corporations and limit deductions for an employee’s compensation to $1 million in a taxable year.
The subsection did not include a provision for inflation adjustments to the $1 million limit, and
that amount has not been statutorily increased.

11 This section was written by Carol A. Pettit.
12 26 U.S.C. § 162(m) was introduced in 1993. 26 U.S.C. §§ 280G and 4999 were introduced in 1984.
13 P.L. 110-343.
14 P.L. 111-5.
15 “Publicly held corporations” are defined as “any corporation issuing any class of common equity securities required
to be registered under section 12 of the Securities Exchange Act of 1934.” 26 U.S.C. § 162(m)(2). Voluntary
registration does not make a corporation “publicly held.” Id.
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In calculating compensation, neither commissions based on income earned through the personal
effort of the employee nor compensation based on achievement of one or more performance goals
is to be included;16 however, other compensation such as retention pay and severance pay is
included in the calculation of compensation subject to the deduction limit.
The $1 million limitation on deductibility applies only to compensation paid to covered
employees. Who is a covered employee is determined at the end of the taxable year. A covered
employee is the CEO (or someone acting in that capacity) or someone who is among the four
most highly compensated employees (other than the CEO) for the taxable year and whose
compensation for the taxable year must be reported to shareholders under the Securities Exchange
Act of 1934.17
Entities Receiving TARP Funds
In October 2008, EESA introduced a new paragraph18 to § 162(m) that is specifically applicable
to recipients of TARP funding. For these entities, deduction for employee compensation to
“covered executives” is limited to $500,000.
The definition of “covered executive” is similar to the definition of “covered employee” found in
§ 162(m)(3). However, it is expanded to explicitly include anyone who is or who acted as the
chief financial officer (CFO). The three most highly compensated officers (other than those who
are or act as CEO and CFO) are also considered covered executives. Determination of who is a
covered executive is made based on the individual’s position at any time during the taxable year
when the authority under EESA § 101(a) is in effect. Thus, if more than one person was or acted
as either the CEO or CFO during the applicable portion of the first taxable year in which this
provision applies, there would be more than five “covered executives” for whom the deduction
limit would apply. In future years the limitation could apply to even more executives because,
once an executive has qualified as a covered executive, that designation continues in all
subsequent years so long as EESA’s authority remains in effect.19
In calculating the remuneration of a covered executive, entities receiving TARP funds may not
use the exclusions available to those not receiving TARP funds. Both commissions and
compensation based on achievement of performance goals must be used in the calculation of the
covered employee’s remuneration.
Limitations on Excess Golden Parachute Payments
Golden parachute payments are limited by denying the payers a tax deduction for “excess
parachute payments” and by imposing upon the recipients a 20% excise tax on the excess
parachute payments.

16 To be excluded from the compensation calculation for § 162(m) deductibility limits, the performance goals on which
the compensation is based must be determined by a compensation committee, which must also certify satisfaction of
the performance goals as well as any other material terms. The material terms, including performance goals, must be
approved by a majority vote of the shareholders before the payment is made. 26 U.S.C. § 162(m)(4)(C)(i)-(iii).
17 26 U.S.C. § 162(m)(3).
18 26 U.S.C. § 162(m)(5).
19 26 U.S.C. § 162(m)(5)(D)(iii).
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Excise Tax
EESA has expanded the context in which excess parachute payments may exist. Whenever an
excess parachute payment exists, whether under the new EESA provisions or under otherwise
existing law, the recipient of the payment will be liable for the 20% excise tax on the excess
payment as imposed by IRC § 4999. The excise tax is assessed in addition to the income tax on
the amount received. When the recipient is an employee, the employer must withhold 20% of the
payment for the excise tax in addition to regular income tax withholdings on the payment.
Denial of Tax Deduction for Excess Parachute Payments
Introduced into law in 1984, IRC § 280G addressed only corporate entities prior to EESA.
However, unlike § 162(m), there was no requirement that the corporation be publicly held,
although there is an exemption for certain small business corporations.20 The section’s
applicability to corporations comes from its definition of parachute payments.
Corporations Not Receiving TARP Funds
To be parachute payments, payments made by an entity not receiving TARP funds must be
contingent upon a change in either the ownership of a substantial portion of the corporation’s
assets or the ownership or control of the corporation. Thus, if no TARP funds have been received,
a non-corporate entity cannot be deemed to have made parachute payments.
Additionally, parachute payments must be “in the nature of compensation to (or for the benefit of)
a disqualified individual.”21 A “disqualified individual” is defined as being an officer, shareholder,
or highly compensated individual who performs personal services for any corporation and is an
employee, independent contractor, or other person specified in the Treasury regulations.22
To be a parachute payment, the aggregate present value of the payment must be three times the
base amount. To the extent that the payment exceeds the allocable base amount, there is an
“excess parachute payment” that cannot be deducted by the corporation. The base amount is
generally the employee’s average compensation for the five most recent tax years ending prior to
the change of ownership or control.
Entities Receiving TARP Funds
Subsection 280G(e) extends the provisions of § 280G to entities receiving TARP funds even
when they are not corporations.23 The small business exemption does not apply to entities
receiving TARP funds.24
For purposes of determining whether TARP recipients have excess parachute payments that
cannot be deducted, covered executives are considered “disqualified individuals.” 25 A covered

20 26 U.S.C. § 280G(b)(5).
21 26 U.S.C. § 280G(b)(2)(A).
22 26 U.S.C. § 280G(c).
23 26 U.S.C. § 280G(e)(1)(C).
24 26 U.S.C. § 280G(e)(1)(D).
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executive’s severance from employment is treated as a change in ownership or control of a
corporation if that severance is due to involuntary termination by the employer or related to the
employer’s bankruptcy, liquidation, or receivership.26
Executive Compensation Limits in the Bankruptcy
Code27
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (BAPCPA).28 Although many of its most publicized changes involved consumer
bankruptcies, BAPCPA also made changes to business bankruptcies. Among the changes was a
new subsection29 that limited the extent to which “key employee retention plans” (KERPs) could
be paid as administrative expenses of the debtor. This restriction generally is more applicable in
chapter 11 reorganizations30 than in chapter 7 liquidations,31 but is not limited to chapter 11.32
Chapter 11 reorganizations are designed to allow the debtor to remain in possession of the
business and continue to operate the business while negotiations are conducted with creditors.
Generally, a trustee is not appointed. The legislative history of the Bankruptcy Act of 1978
indicates that chapter 11 presumes that reorganization is apt to be more successful if the debtor’s
management leads it through the reorganization and that the continuity of business operations will
benefit both the creditors and the public.33
Prior to BAPCPA, KERPs were used to provide retention bonuses and severance pay to
management employees who remained with the debtor business to manage it through its
reorganization. However, there was a perception that KERPs were being abused to favor insiders.
This perception of abuse led to BAPCPA’s restrictions on retention pay and bonuses as
administrative expenses in a bankruptcy.
Administrative expenses34 have a high statutory priority in bankruptcy35 and generally must be
paid before other priority claims as well as non-priority unsecured claims. As a result of
BAPCPA, administrative expenses generally cannot include either allowances or payments of
inducements to remain with the debtor company if those inducements are transfers to an insider
of the debtor or obligations incurred for the benefit of the insider. The Bankruptcy Code does

(...continued)
25 26 U.S.C. § 280G(e)(1)(A).
26 26 U.S.C. § 280G(e)(1)(B).
27 This section was written by Carol A. Pettit.
28 P.L. 109-8 (2005).
29 11 U.S.C. § 503(c).
30 11 U.S.C. § 1101 et seq.
31 11 U.S.C. § 701 et seq.
32 In certain circumstances, business operations may continue when a business is in a chapter 7 bankruptcy; in those
cases, limitations on retention payments may be relevant.
33 H. Rept. 95-595, 95th Cong., 1st Sess. 233 (1977).
34 11 U.S.C. § 503.
35 11 U.S.C. § 507(a)(2).
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establish standards under which such inducements may be allowed or paid. However, there is
some question as to whether the standards can realistically be met within the context of a pending
bankruptcy. To be allowed, the court must find, based on evidence in the record, that (1) the
inducement “is essential to retention of the person because the individual has a bona fide job offer
from another business at the same or greater rate of compensation”36 and (2) the person’s services
are “essential to the survival of the business.”37 In addition, the court must compare the amount of
the inducement to other similar transfers or obligations to nonmanagement employees, for any
purpose, within the same calendar year. To be allowed, the inducement to the insider may be no
more than 10 times the mean of the nonmanagement transfers or obligations.38 In the case where
there have been no similar transfers or obligations to nonmanagement employees within the
calendar year, the amount of the insider’s inducement must be no more than 25% of any similar
transfer or obligation, for any purpose, benefiting the insider during the previous calendar year.39
Severance payments to insiders may be allowed as administrative expenses in a post-BAPCPA
bankruptcy only if “the payment is part of a program that is generally applicable to all full-time
employees.”40 Such a payment will not be allowed if it is more than 10 times the mean severance
pay for nonmanagement employees during the same calendar year.41
BAPCPA further prohibited other transfers and obligations benefitting officers, managers, or
consultants who were hired post-petition if made “outside of the ordinary course of business and
not justified by the facts and circumstances of the case.”42
Since BAPCPA’s passage, there has been a move toward paying managers incentive payments,
which are not restricted.43 Though some of these incentive pay schemes have been rejected by the
courts as actually being retention bonuses that did not meet BAPCPA’s requirements,44 others
have been upheld as incentive bonuses and, therefore, not subject to the restrictions imposed by
the post-BAPCPA Bankruptcy Code.45
Congressional Proposals
Recent Congresses have offered a number of proposals concerning executive compensation.
Some of these involve additional disclosure of executive compensation to shareholders. Recently,

36 11 U.S.C. § 503(c)(1)(A).
37 11 U.S.C. § 503(c)(1)(B).
38 11 U.S.C. § 503(c)(1)(C)(i).
39 11 U.S.C. § 503(c)(1)(C)(ii).
40 11 U.S.C. § 503(c)(2)(A).
41 11 U.S.C. § 503(c)(2(B).
42 11 U.S.C. § 503(c)(3).
43 In the (Red)® The Business Bankruptcy Blog, http://bankruptcy.cooley.com/2007/10/articles/business-bankruptcy-
issues/the-terrible-twos-a-look-at-bapcpas-impact-on-business-bankruptcy-cases-at-its-second-anniversary/ (Oct. 16,
2007).
44 E.g., In Re Dana Corporation, 351 B.R. 96 (S.D.N.Y. 2006); id. at 102 (“this compensation scheme walks, talks, and
is a retention bonus”).
45 E.g., In re Global Home Products, LLC, 2007 WL 689747 (Bankr. D. Del. Mar. 6, 2007); In re Dana Corporation,
2006 WL 3479406 (S.D.N.Y. Nov. 30, 2006)(mem.) (finding Dana Corporation’s revised incentive plan sufficiently
different than a retention bonus plan).
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several proposals have been made involving TARP recipients. Other areas in which bills
involving executive compensation have been introduced include tax and bankruptcy.
Disclosure Proposals46
CRS anticipates that one or more bills will be introduced in the 111th Congress addressing issues
similar to those addressed by the following bills in recent Congresses. As of the date of this
report, our research has not revealed introduction of any similar bills.
An example of additional disclosure is H.R. 4291, 109th Congress. This bill would have amended
Section 16 of the Securities Exchange Act of 193447 to require that each reporting issuer must
include in the annual report and in any proxy solicitation a comprehensive statement of the
issuer’s compensation plan for the principal executive officers, including any type of
compensation, the short- and long-term performance measures that the issuer uses for
determining compensation, and the policy of the issuer concerning other specified measures of
compensation. The proxy solicitation materials would have been required to have a separate
shareholder vote to approve the compensation plan. The bill would also have required the
disclosure of golden parachute compensation in any proxy solicitation material concerning an
acquisition, merger, consolidation, or proposed sale.
In the 110th Congress, H.R. 1257, the Shareholder Vote on Executive Compensation Act would
have amended Section 14 of the Securities Exchange Act of 193448 to add a new subsection
which would have required a separate, nonbinding shareholder vote in any proxy or consent or
authorization for an annual meeting to approve the compensation of executives as disclosed in
accordance with the SEC’s compensation disclosure rules.
Also in the 110th Congress, S. 2866 would have amended Section 304 of the Sarbanes-Oxley Act
of 200249 to provide for a longer look-back period for reimbursement of compensation for
misconduct by an executive to the issuer. It would have amended the Securities Exchange Act of
1934 to provide during an annual meeting for a nonbinding shareholder vote on executive
compensation. It would have also amended the Federal Property and Administrative Services Act
of 194950 to require federal contractors to disclose their executive compensation structures.
Proposals to Impose Limitations on TARP Recipients51
Bills concerning executive compensation limits have been introduced in the 111th Congress.
Among these bills are H.R. 851, which would require any institution provided with assistance
under the Emergency Economic Stabilization Act of 2008 to meet standards for executive
compensation and corporate governance, and H.R. 857 and S. 360, which would prohibit any

46 This subsection was written by Michael V. Seitzinger.
47 15 U.S.C. § 78n.
48 15 U.S.C. § 78n.
49 15 U.S.C. § 7243.
50 41 U.S.C. §§ 251 et seq.
51 This subsection was written by Michael V. Seitzinger.
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officer or employee of an entity receiving funds under TARP from being compensated more than
the President of the United States.
With the acknowledgment by AIG of the payment of bonuses to a number of its employees, bills
have been introduced to recover at least some of the bonuses paid. These bills would use different
ways of recovering the bonuses. For example, H.R. 1575 would authorize the Attorney General to
recover excessive compensation paid by entities which have received federal financial assistance
on or after September 1, 2008. H.R. 1664, passed by the House, would amend the Emergency
Economic Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and
compensation not based on performance standards paid by companies receiving direct capital
investments of taxpayer money.
Tax Proposals52
A bill that would limit the deductibility of employee compensation for all employers, corporate or
noncorporate, was introduced in the 111th Congress. H.R. 1594 proposed limiting the deduction
for compensation paid to an employee in excess of the greater of $500,000 or “an amount equal to
25 times the lowest compensation for services performed by any other full-time employee during
such taxable year.” Since it applies to all employers and is not limited to a few top executives, the
provision is broader than either the § 162(m) provisions in EESA or the provisions that pre-date
EESA.
Following AIG’s bonus announcement in 2009, both the House and Senate introduced bills that
would have imposed high taxes both retrospectively and prospectively53 on bonuses paid by
entities receiving TARP funds or other federal emergency economic assistance after December
31, 2007. H.R. 1586, which was passed by the House, would have imposed a 90% income tax on
the bonuses to the extent that the bonuses increased the recipient’s adjusted gross income to more
than $250,000. The 90% rate would have been instead of, rather than in addition to, the
taxpayer’s regular income tax rate. Other taxable income would be taxed at the regular tax rates.
S. 651 proposed imposing an excise tax on “excessive bonuses.” The 35% excise tax would be
imposed on both the payer and the recipient resulting in a total 70% of the bonuses being paid as
excise tax. The excise tax would have been in addition to, rather than instead of, the recipient
taxpayer’s normal income tax rate.
Bankruptcy Proposals54
In the 109th Congress, H.R. 5113 and its companion S. 2556 proposed expanding the prohibition
on retention payments introduced by BAPCPA as 11 U.S.C. § 503(c). The bills would have
included performance and incentive payments and other bonuses as well as “any other
compensation enhancement.” The bills would also have extended the reach of 11 U.S.C.

52 This subsection was written by Carol A. Pettit.
53 See CRS Report R40466, Retroactive Taxation of Executive Bonuses: Constitutionality of H.R. 1586 and S. 651, by
Erika K. Lunder, Robert Meltz, and Kenneth R. Thomas.
54 This subsection was written by Carol A. Pettit.
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§ 503(c)(3) to include payments made within the ordinary course of business as well as those
outside of the ordinary course of business.55
In the 110th Congress, H.R. 3652 and its companion S. 2092 also proposed expanding the general
restrictions on retention payments to include both performance and incentive payments, but went
on to include “bonus[es] of any kind, or other financial returns designed to replace or enhance
incentive, stock, or other compensation in effect” before the bankruptcy petition was filed.56 The
proposed modifications to § 503(c) of the Bankruptcy Code also extended paragraph 503(c)(3) to
payments made within the ordinary course of business. The bills also proposed restricting
compensation to officers and directors of the reorganized debtor, making the compensation
subject to court approval as reasonable when compared to compensation paid to others in the
industry in similar positions at similar jobs.57 However, even if found reasonable, to be approved
the compensation could not be disproportionate when compared to economic concessions from
nonmanagement workforce during the bankruptcy case. The bills also included a number of
provisions that would indirectly limit executive compensation by linking it to compensation
provided to other employees.
CRS anticipates that bills will be introduced in the 111th Congress addressing further limitations
on executive compensation for companies involved in chapter 11 bankruptcies, but, as of the date
of this report, no such bills have been found. However, although it did not propose a change to the
Bankruptcy Code, H.R. 1575, discussed in the section on “Proposals to Impose Limitations on
TARP Recipients,” incorporated language similar to that in § 548 of the Bankruptcy Code, which
addresses fraudulent transfers.

55 See supra note 41 and accompanying text.
56 H.R. 3652 § 7.
57 H.R. 3652 § 6 (amending 11 U.S.C. § 1129).
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Appendix.
This table lists selected provisions in federal law that address executive compensation. Some of
these provisions are not discussed in the body of the report, but are listed here for reference.
Executive compensation is used broadly in the context of this table to describe various types of
compensation including retention payments and “golden parachutes.” The table focuses on
limitations on executive compensation in four areas of law: bankruptcy, banking, securities, and
tax, but it includes some provisions outside those areas. The table includes provisions from both
the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343) and the American
Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). EESA’s provisions are listed as
originally enacted, but with a notation if they have been modified by ARRA.
Table A-1. Selected Provisions in Current Federal Law
Area of Law
Citation
Summary
Bankruptcy
11 U.S.C. § 503(c)
Generally will not allow retention payments to insiders to be
included as administrative expenses of the bankruptcy estate.
Banks and Banking
12 U.S.C. § 1431(l)(1)(C)(vi)
In exercising temporary authority to purchase obligations
issued by any Federal Home Loan Bank, the Secretary of the
Treasury shall consider “restrictions on the use of Federal
Home Loan Bank resources, including limitations on the
payment of ... executive compensation.” P.L. 110-289, §
1117(c).
Banks and Banking
12 U.S.C. § 1455(l)(1)(C)(vi)
Similar to provision in 12 U.S.C. § 1431 (above), but applying
to Freddie Mac. P.L. 110-289, § 1117(b).
Banks and Banking
12 U.S.C. § 1719(g)(1)(C)(vi)
Similar to provision in 12 U.S.C. § 1431 (above), but applying
to Fannie Mae. P.L. 110-289, § 1117(a).
Banks and Banking
12 U.S.C. § 1786(t)(1)
Pertaining to institution-affiliated parties of insured credit
unions—golden parachute payments may be prohibited or
limited.
Banks and Banking
12 U.S.C. § 1828(k) Pertaining
to
institution-affiliated parties of insured
depository institutions—golden parachute payments may be
prohibited or limited.
Banks and Banking
12 U.S.C. § 2277a-10b
Farm Credit System institutions—golden parachute
payments may be prohibited or limited.
Banks and Banking
12 U.S.C. § 4518
Al ows Director of Federal Housing Finance Agency to
prohibit and withhold executive compensation from
executives of regulated entities (Fannie Mae, Freddie Mac,
federal home loan banks) if wrongdoing has occurred; also
provides authority for limiting golden parachute payments to
these executives (§§ 1113 and 1114 of P.L. 110-289, Housing
and Economic Recovery Act of 2008).
Securities
15 U.S.C. §§ 78l, 78m
Require covered issuers to register with the Securities and
Exchange Commission (SEC) and to file with it periodic and
other required reports containing material information.
Executive compensation in most cases would be considered
material information; i.e., information which a reasonable
investor would want to know about a company in making an
investment decision. See Basic, Inc. v. Levinson, 485 U.S. 224
(1988).
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Area of Law
Citation
Summary
Securities
15 U.S.C. § 7243
Requires CEOs and CFOs to disgorge bonuses and other
incentive-based compensation and profits on stock sales if
material non-compliance with SEC financial reporting
requirements results from misconduct.
Education
20 U.S.C. § 1087-2(r)(7)(E)
Secretary of the Treasury may limit executive compensation
if the capital ratio of the Student Loan Marketing Association
falls below 1.75%.
Tax
26 U.S.C. § 162(m)
Excessive employee remuneration not deductible—includes
lower limit imposed by P.L. 110-343, § 302.
Tax
26 U.S.C. § 280G
No tax deduction al owed for excess golden parachute
payments.
Tax
26 U.S.C. § 4999
Additional tax (20%) imposed on recipient of excess golden
parachute payment.
Federal
10 U.S.C. § 2324(e)(1)(K)
Limitation on the extent to which the cost of making golden
Procurement
parachute payments can be included in al owable costs under
defense contracts.
Federal
41 U.S.C. § 256(e)(1)(K)
Limitation on the extent to which the cost of making golden
Procurement
parachute payments can be included in al owable costs under
non-defense federal contracts.
Emergency
P.L. 110-343 § 111
[Al of the fol owing provisions have been modified by the
Economic
American Recovery and Reinvestment Act of 2009. See
Stabilization Act of
below.]
2008
Allows the Secretary of the Treasury to require that financial
institutions whose troubled assets are directly purchased
meet appropriate standards for executive compensation.
These standards are required to include limits on incentive-
based compensation for unnecessary and excessive risks,
recovery of bonuses and incentive compensation paid to a
senior executive officer based on criteria later proven to be
materially inaccurate, and a prohibition on golden parachutes
paid to its senior executive officer.
The term “senior executive officer” is one of the five highly
paid executives of a public company whose compensation
must be disclosed under the Securities Exchange Act of 1934
and non-public counterparts.
If the Secretary of the Treasury decides that auction
purchases of the troubled assets are appropriate and if the
purchases per financial institution exceed $300,000,000, the
Secretary shal prohibit any new employment contract with a
senior executive officer that provides a golden parachute
upon an involuntary termination, bankruptcy filing,
insolvency, or receivership.
American Recovery P.L. 111-5, Title VII
Modified above provisions of executive compensation
and Reinvestment
contained in the Emergency Economic Stabilization Act of
Act of 2009
2008.
The Secretary of the Treasury must develop appropriate
standards for compensation of executives of companies
receiving assistance under the Troubled Assets Relief
Program. These standards shall include the following:


• Limits on compensation must exclude incentives
for the five highest paid executives of the TARP
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Area of Law
Citation
Summary
recipient to take unnecessary and excessive risks.
• A provision for the recovery by the TARP
recipient of any bonus, retention award, or
incentive compensation paid to the five highest
paid executives and the next 20 most highly
compensated employees of the TARP recipient,
based upon criteria that are later found to be
materially inaccurate.
• A prohibition on the TARP recipient’s making any
golden parachute payment to the five highest paid
executives or any of the next five highest paid
employees of the TARP recipient.
• A prohibition on a TARP recipient’s paying a
bonus, retention award, or incentive
compensation, except that the prohibition shall not
apply to paying long-term restricted stock, so long
as this stock does not ful y vest during the period
in which the TARP recipient has outstanding
financial assistance, has a value not greater than
one-third of the total amount of the annual
compensation of the employee receiving the stock,
and is subject to other conditions that the
Secretary of the Treasury may determine to be in
the public interest. The prohibition is not to be
construed to apply to a bonus payment required to
be paid according to a written employment
contract executed on or before February 11, 2009.
The prohibition applies to the highest paid person
of financial institutions receiving less than $25
million in financial assistance, to at least the five
highest paid employees of financial institutions
receiving at least $25 million and less than $250
million in financial assistance, to the five highest
paid executive officers and at least the next 10
highest paid employees of financial institutions
receiving at least $250 million and less than $500
million, and for financial institutions receiving
financial assistance of $500 million or more to the
five highest paid officers and at least the next 20
highest paid employees.
• A prohibition on any compensation plan
encouraging manipulation of the reported earnings
of a TARP recipient to enhance the compensation
of any of its employees.
• A requirement for the establishment of a Board
Compensation Committee.
The chief executive officer and the chief financial officer of
each TARP recipient must certify that the TARP recipient
has complied with the standards issued by the Secretary of
the Treasury and file the certification with the Securities and
Exchange Commission if the company’s securities are
publicly traded or with the Secretary of the Treasury if the
company’s securities are not publicly traded.
The Board Compensation Committee which each TARP
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Area of Law
Citation
Summary
recipient is required to establish must be made up of
independent directors and must review employee
compensation plans. The Board must meet at least
semiannual y to discuss and evaluate employee compensation
plans. If the TARP recipient’s stock is not registered with the
SEC and it has received $25 million or less of TARP
assistance, the Board Compensation Committee’s duties
shal be performed by the recipient’s board of directors.
The board of directors of each TARP recipient must have a
policy concerning excessive or luxury expenses, including
entertainment, office renovations, transportation services,
and other unreasonable expenditures.
Any annual or other meeting of the shareholders of a TARP
recipient must permit a separate shareholder vote to
approve the compensation of executives. The vote shall be
nonbinding and cannot be construed to overrule a decision
by the board of directors.
The Secretary of the Treasury is required to review bonuses,
retention awards, and other compensation paid to the five
highest paid executives and the next 20 highest paid
employees of each company that received TARP assistance
before February 17, 2009 (the act’s date of enactment), to
determine whether any payments were inconsistent with the
purposes of TARP or contrary to the public interest.
Payments determined to be excessive shall be reimbursed to
the federal government.
In consultation with the appropriate federal banking agency,
the Secretary of the Treasury shal permit a TARP recipient
to repay any assistance provided to the financial institution,
without regard to whether the financial institution has
replaced the funds from any other source or to any waiting
period. When the assistance is repaid, the Secretary of the
Treasury shall liquidate warrants associated with the
assistance at the current market price.
Source: CRS

Author Contact Information

Michael V. Seitzinger
Carol A. Pettit

Legislative Attorney
Legislative Attorney
mseitzinger@crs.loc.gov, 7-7895
cpettit@crs.loc.gov, 7-9496




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