WASHINGTON — As the acting special master for the Troubled Asset Relief Program, Patricia Geoghegan is responsible for determining the paychecks of the top executives at the biggest Tarp recipients.

Every year, those companies make their pitch to the Treasury Department about what their top 25 employees should take home. It's up to Geoghegan to decide who gets what.

In the latest determinations, issued April 6, Geoghegan's office froze 2012 compensation for the chief executives at AIG, Ally Financial and General Motors (GM) — the three remaining companies that received "exceptional" Tarp assistance — at the 2011 levels.

The office used the same framework it has since 2009 for pay packages for other executives: cash salary continues to be limited in most cases to $500,000 a year; and the majority of pay — 83% overall — is being issued in the form of stock, tying its ultimate value to each employer's performance. Top executives are prohibited from hedging their compensation, and their bonuses are subject to being clawed back.

As an administrator, Geoghegan's job is primarily to interpret the compensation rules outlined by Congress and written by Treasury in 2009, which apply to all of the remaining Tarp recipients. Although hundreds have exited the program, including four of the original seven that received what was defined as "exceptional" assistance — Bank of America (BAC), Citigroup (NYSE:C), Chrysler Financial and Chrysler — Geoghegan's office still plays a role in the ongoing debate about compensation in the wake of the financial crisis.

She spoke with American Banker recently about how pay determinations are made, her changing role as Tarp winds down and the lasting legacy of the Office of Special Master.

How are these executive compensation determinations made each year?
Earlier in the year, we asked for a lot of compensation information, and for their [companies participating in Tarp] proposals for compensation for their top 25 people. The essence of what we do is, based on the company's proposal, decide the overall amount of compensation for each of the top 25 people and the structure, meaning what are the basic elements of the package of compensation.

How is compensation generally structured?
One of our first principles is that the majority of the compensation in general should be in stock, so that in almost all cases at least 75% of the compensation is in stock. And cash salary is generally limited ... to no greater than $500,000.

The stock is divided into two parts. In most cases, up to a third of the compensation is in what we call long-term restricted stock, and that is incentive compensation. It's based on achievement of performance metrics, and on top of that, even if the executive does achieve his or her performance goals and the compensation committee awards the full amount of the target compensation, then the executive can only cash out that award as the company repays its Tarp obligations in 25% increments.

One of the things that Congress said was, "Absolutely no bonuses, except if the bonus does not exceed a third of compensation and is payable only in a certain kind of stock."

The remainder [of the salary] accrues on every payroll date, but instead of being paid in cash, executives are paid in stock or stock units — that is, promises to deliver stock in the future.

So if you look at the package as a whole, it does tie pay to performance, and secondly it aligns the interests of the executive with the interests of its shareholders, of which the U.S. taxpayer is a very large one.

What other criteria do you use to make these determinations?
When we get these submissions from the company ... they also have market data that they've gotten to establish what comparable positions at comparable companies pay, and that's an important part of our determinations. That's important because the interim rule does have six principles, [including] avoiding incentives to take excessive risk, making sure that the company can remain a competitive enterprise and retain and recruit talented employees ... appropriate allocation of components of compensation ... and that compensation should not be excessive in comparison to what comparable companies pay.

How do the so-called "say on pay" rules that we're hearing about now intersect with the rules established for Tarp recipients?
The say-on-pay that we're talking about now ... came in through the Dodd-Frank Act. There is a say-on-pay requirement in the interim final rule for public companies that were Tarp recipients, so public companies that are Tarp recipients have had to do say-on-pay [shareholder votes] since 2009.

I would venture to say that it was one of the things that was in the interim final rule that was a foundation for the inclusion of that provision.

Why are compensation restrictions still an important part of Tarp?
In order to be sure that the taxpayers' investment was properly invested, Congress and the administration wanted to be sure that certain standards were met, not only on compensation but also on corporate governance.

What is your background, and how did you end up stepping into this role?
I practiced law in NYC for 33 years. I was a partner for more than 25 years at a Wall Street firm. I retired at the end of 2007. For the last 10 years of my career I was doing executive compensation [related legal work].

I got a call about possibly working as a lawyer in the Office of Financial Stability, with some work in the Office of the Special Master, so I came to D.C. in August of 2009. I was involved in a lot of interpretation of the interim final rule ... and was involved in working on the first set of determinations, which was the most challenging, because that was the time when we developed all of our rules of thumb and guidelines.

Ken Feinberg who was obviously the very well-known special master from the beginning, after he had set everything up and done the first two rounds of determination letters, he actually went off to deal with the BP claims fund. So it was in September of 2010 when he left and I became acting special master.

How is your role changing as Tarp winds down?
The Office of Financial Stability as a whole is still quite a vital place. Yes, the number of institutions [overseen] is much smaller than it was ... (but) OFS still has a portfolio of investments, and therefore it has to monitor that portfolio, it has to think about how it can dispose of the portfolio. There have been auctions ... sometimes institutions in the portfolio are the subject of acquisitions or other kinds of corporate transactions. Some of these things may require answering of some questions regarding executive compensation.

So there's never a dull moment. There are still questions to be answered, companies are going through restructuring in some cases, so we have to deal with all of those day-to-day challenges.

Why do you think executive compensation is still such a contentious issue?
There's no doubt about it, people are interested in executive compensation. They may not be deeply interested in derivatives instruments and in the complicated transactions that financial institutions deal with on a day-to-day basis, but they can basically understand executive compensation, so it's just a high-profile topic.

Do you think the work of your office will have any lasting impact on how the industry broadly views executive compensation?
I like to say at the Office of Special Master, our responsibility is Tarp. And I don't like to feel that we've got goals and responsibilities that are beyond what's clearly our mandate. However, obviously what we have done has played a part in the development of stronger standards in executive compensation.

I think a lot of the things that we have done have, in some cases, been a first, and certainly I think have had some influence on what standards have been adopted internationally, but I think what we have done has been further developed in Dodd-Frank.

Our work was a step in the development of the broader standards that are included in Dodd-Frank and in the international standards that have been adopted worldwide.

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