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4000 - Advisory Opinions
Applicability of the golden parachute regulation to the proposed
severance payment to a former executive of a national bank
FDIC--97--2
January 23, 1997
Karen L. Main, Senior Attorney
I am writing in response to your request for a formal written
determination from our office regarding the applicability of the golden
parachute regulation, 12 C.F.R. Part
359, to the proposed severance payment to a former executive
officer of a national bank.
{{2-27-98 p.4984.01}}
Facts
I will begin with a recitation of the facts relevant to the
consideration of this matter as set forth in your letter dated December
3, 1996 and its attachments. Your client, (the
"Bank") and its shareholder, (the
"Shareholder"), entered into a five year employment contract with
(the "Officer") on December 28, 1995 (the
"Employment Contract"). The Officer had been a senior executive
officer of the Bank since its formation approximately ten years ago. On
October 17, 1996, less than one year after executing the Employment
Contract, the Officer voluntarily resigned as Chief Executive Officer
of the Bank (and all other positions with the Bank and its
Shareholder). At that time, the Bank and its Shareholder entered into a
severance/settlement agreement and release (the "Agreement")
whereby the Officer released the Bank from the Employment Contract and
the Bank agreed to pay certain benefits to the Officer upon specified
conditions.
There are two types of benefits contemplated by the Agreement:
payment for (i) accumulated vacation and sick days and (ii)
compensatory (or "comp") time. Due to his status as the highest
ranking officer of the Bank, the Officer recorded his own vacation,
sick and comp time. His records indicate that he believed that he was
entitled to 102.5 vacation days, 61 sick days, and 2,350 hours of comp
time. The Bank disputes these totals. The Bank has, however, agreed to
the payment of benefits under the Agreement equal to ten months'
salary at the base rate of pay.
Section 3 of the Agreement conditions the payment of the
vacation/sick days and comp time on the approval of the Office of the
Comptroller of the Currency (the "OCC"), the Bank's primary
federal regulator, and the Federal Deposit Insurance Corporation (the
"FDIC") (or unless and until the Boards of the Bank and its
Shareholder are satisfied that no adverse action will be taken by any
regulatory agency against the Bank or its affiliates).
A chapter of the Bank's Employee Manual (the "Manual")
describes the Bank's vacation and sick leave policies. The Manual does
not address comp time. The Bank has been in existence approximately ten
years; since its inception, and continually thereafter, the Bank has
paid all departing employees for accrued vacation time at the time of
severance. This is permitted by the policy set forth in the Manual. The
Manual provides that sick leave may be paid upon termination only with
the approval of the Chief Executive Officer. For the last 4 years, all
officers, but no non-officers, have been paid for accrued sick leave at
termination.
Until 4 years ago, the Bank also paid departing employees for
accumulated comp time. However, at that time, all comp time payments
and accumulation were ostensibly discontinued. Nevertheless, since
discontinuing the practice, the Bank has paid at least one departing
employee-officer for accumulated comp time under the theory that her
employment with the Bank pre-dated the discontinuation of the policy of
paying Bank employees for comp time. The Officer's employment also
began before the discontinuation of the comp time policy. However,
since ending the accumulation of comp time, several other employees
separated from the Bank and received no payment for accumulated comp
time.
There are several other salient facts concerning the Bank and its
regulatory/supervisory posture which should be noted. For purposes of
applying the definition of "golden parachute payment" under
section 359.1(f), the Bank would be deemed to be "in a troubled
condition" and has a composite CAMEL rating of 4 as of its last
examination which was conducted in the fall of
1995. 1
Section 359.1(f)(1)(ii)(C)
and -(D). The Officer's resignation come in the context of poor
performance by the Bank as well as supervisory and Board discontent
with the Officer's performance. And finally, you have received, on
behalf of the Bank, assurances from the OCC that it will not object to
the terms of the Agreement.
{{2-27-98 p.4984.02}}
Analysis
In your letter, you have asked me to assume that, unless excepted,
the proposed payments would fall within the definition of a "golden
parachute payment." Section 359.1(f). I believe that your assumption
is correct. However, you have advanced the position that the proposed
payments may be permitted under an exception to the definition of
"golden parachute payment" found at section 359.1(f)(2)(v) which
addresses a nondiscriminatory severance pay plan or arrangement.
Therefore, I will proceed by discussing each aspect of the relevant
exception and evaluating its applicability to the factual situation
described hereinabove.
Section 359.1(f)(2)(v)
The exception under consideration is set forth as follows:
Any payment made pursuant to a nondiscriminary severance pay
plan or arrangement which provides for payment of severance benefits to
all eligible employees upon involuntary termination other than for
cause, voluntary resignation, or early retirement; provided, however,
that no employee shall receive any such payment which exceeds the base
compensation paid to such employee during the twelve months . . .
immediately preceding termination of employment, resignation or early
retirement, and such severance pay plan or arrangement shall not have
been adopted or modified to increase the amount or scope of severance
benefits at a time when the insured depository institution . . .
was in a condition specified in paragraph (f)(1)(ii) of this section
. . . without the prior written consent of the appropriate federal
banking agency.
Section 359.1(f)(2)(v).
1. The severance pay plan shall not have been adopted or
modified while the Bank is in a condition specified in section
359.1(f)(1)(ii).
In order to focus the discussion on the documents which are relevant
to this analysis, the various components of this exception will not be
examined in the order in which they appear in the definition. Rather, I
will begin by reviewing the last requirement as set forth above.
Such severance pay plan or arrangement shall not have been
adopted or modified to increase the amount or scope of severance
benefits at a time when the insured depository institution is in a
[troubled condition or has a rating of 4 or 5 under the Uniform
Financial Institutions Rating System].
Section 359.1(f)(2)(v). According to your letter, the Bank
would be deemed to be in a troubled condition as a result of its last
examination in the fall of 1995. Moreover, during one of our telephone
conversations, you informed me that the Bank's CAMEL rating is a 4 as
a consequence of that examination. Both the Employment Contract and the
Agreement were entered into subsequent to these two events, and
therefore, could not be considered as a "severance pay plan" or
"arrangement" for purposes of this exception.
In order to determine what payment(s) to the Officer, if any, are
authorized pursuant to this exception, the Bank must rely upon the
benefits/payments to employees which are provided for the relevant
portions of the Bank's Manual. The Manual and the policies described
therein pre-date the circumstances (the Bank's troubled condition and
the CAMEL 4 rating) which dictate that the provisions of the Employment
Contract and the Agreement can not be controlling in the instant case.
2. The nondiscriminatory severance pay plan or arrangement
must provide for payment of severance benefits to all eligible
employees.
For the reason set forth above, the Employment Contract and the
Agreement cannot serve as the basis of the Bank's payment to the
Officer. Moreover, the provisions of the Employment Contract governing
the Officer's compensation upon termination are not applicable to the
situation described in your letter. The Employment Contract provides
for
{{2-29-00 p.4984.03}}the Officer's compensation
in the event of involuntary termination by the Bank (not for cause) or
as a result of a change in control. It is also worth noting that the
Agreement does not satisfy the definition of "nondiscriminatory"
as set forth in section 359.1(j). The definition of
"nondiscriminatory" requires that,
the plan, contract or arrangement . . . applies to all
employees of an insured depository institution . . . who meet
reasonable and customary eligibility requirements . . . such as
minimum length of service requirements. [It] may provide different
benefits based only on objective criteria such as salary, total
compensation, length of service, job grade or classification, which are
applied on a proportionate basis.
Section 359.1(j). The Agreement provides for the payment to
the Officer of vacation time, sick leave and comp time. First, the
Agreement only applies to the Officer--not to all employees of the Bank
who meet reasonable and customary eligibility requirements. And it
provides him with benefits/compensation which are not afforded to other
employees of the Bank, e.g., the payment of comp time is no longer
offered to other Bank employees--not even to Bank officers. Only the
provisions of the Bank's manual can serve as the basis for a
nondiscriminatory severance pay plan or arrangement.
Having determined that any payment made to the Officer will have to
be in accordance with the applicable provisions of the Bank's Manual
in order to satisfy the exception for a nondiscriminatory severance pay
arrangement found in section 359.1(f)(2)(v), it is now possible to
determine what proposed payments to the Officer would be authorized. As
set forth in the Manual, all employees are entitled to receive payment
for accrued annual vacation upon their termination (except for reason
of gross misconduct). The policies governing the accrual and payment
for annual vacation apply to all employees of the Bank who meet
reasonable and customary eligibility requirements such as minimum
length of service. In addition, the benefits offered thereby are based
on objective criteria such as salary, total compensation, length of
service, job grade or classification. According to your letter, it has
been the policy of the Bank to pay all departing employees for the
accrued vacation time since the Bank's inception. This practice
conforms with the definition of "nondiscriminatory" set forth
above, and satisfies the requirement that the severance benefits be
offered to all eligible employees. Therefore, the annual vacation
policy outlined in the Bank's Manual, while not a formal, written
severance plan, does constitute a severance pay "arrangement" for
purposes of section 359.1(f)(2)(v). Therefore, the Officer would be
entitled to receive payment for his accrued vacation time provided that
the Bank and the Officer can reach agreement as to how much vacation
time the Officer has actually earned.
With respect to any accumulated sick leave, the Manual
states that,
no payment shall be made for accrued sick leave of an
employee upon termination of his employment with the Bank. Exceptions
to this policy must be approved by the Chief Executive Officer.
Manual, paragraph 301. For the last 4 years, all officers, but
no non-officers, have been paid for accrued sick leave at termination.
The definition of "nondiscriminatory" in section 359.1(j) states
that the severance pay arrangement in question may provide different
benefits to groups of employees (with certain group size
restrictions)--such as would appear to be the case at the Bank with
respect to the payment for accumulated sick leave. However, the Bank's
practice of basing the payment of sick leave on the approval of the
Chief Executive Officer does not conform with the definition's
requirement that the different benefits be "based only on objective
criteria such as salary, total compensation, length of service, job
grade or classification." Section 359.1(j). Leaving the
determination of whether to compensate a departing Bank employee for
accumulated sick leave to the discretion of the Bank's Chief Executive
Officer is not an objective standard under the definition of
"nondiscriminatory" set forth in the regulation. Therefore,
payment of the Officer's accumulated sick leave would not be
authorized pursuant to the Bank's nondiscriminatory severance pay
arrangement and, therefore, does not fall within the exception.
Finally, with respect to comp time, there is no provision for the
payment of comp time in the Bank's Manual, and the Bank has not paid
comp time to employees upon termination
{{2-29-00 p.4984.04}}(with one exception) for the
last 4 years. Therefore, the payment of comp time to the Officer would
not be authorized pursuant to section 359.1(f)(2)(v).
3. The payment shall be made upon involuntary termination
other than for cause, voluntary resignation, or early retirement.
One of the attachments to your letter is a copy of the Officer's
resignation letter, dated October 17, 1996, addressed to the Bank's
and the Shareholder's Boards of Directors. The Officer's letter and
the Agreement both recite that the Officer resigned voluntarily.
Although the Agreement can not serve as the basis for providing
compensation to the Officer under Part 359, it does support the
position that the Officer's departure from the Bank was due to his
voluntary resignation. You have previously disclosed to me in our
telephone conversations, and have noted in your letter that the
Officer's resignation came in the context of poor performance by the
Bank, and supervisory and Board discontent with the Officer's
performance. There is, as you point out, a "for cause"
termination provision in the Employment Contract. You note, however,
that the Bank/Shareholder and the Officer do not believe that the
Officer's termination is governed by that provision. I would agree
with your assertion. The Officer voluntarily proffered his resignation,
and the executed Agreement evidences the Bank's and Shareholder's
acceptance thereof. To quote from your letter, "the context and
environment do not change the fact of voluntary resignation."
4. No employee shall receive any payment which exceeds the
base compensation paid to such employee during the 12 months
immediately preceding termination of employment.
The Officer's base compensation during the twelve months preceding
his resignation was $120,000 per year. The payment of benefits
contemplated by the Agreement would be for a total of ten months salary
at the base rate of pay. However, as discussed in section 2, above, the
payment of accumulated sick leave as well as comp time can not be
supported under the "nondiscriminatory severance pay plan"
exception. Therefore, it appears likely that the Officer will receive a
smaller sum than the ten months salary contemplated under the
Agreement, and will meet the requirement of section 359.1(f)(2)(v). In
order to comply with this condition of the exception, the amount of the
vacation leave to be paid to the Officer can not exceed his $120,000
annual salary.
Section 359.4(a)(1)
There is one other section of Part 359 which should be addressed in
connection with your request. Section 359.4(a)(1) provides that an
insured depository institution may make a golden parachute payment if
and to the extent that,
[t]he appropriate federal banking agency, with the written
concurrence of the [FDIC], determines that such a payment or
agreement is permissible.
Clearly, the payment of the proposed sick leave and comp time would
fall within the definition of a golden parachute payment under
section 359.1(f)(1). In
order for the Bank to be able to pay the Officer for the sick leave and
comp time as set forth in the Agreement, the Bank or the Officer would
have to make a request pursuant to section 359.4(a)(1) to the
appropriate federal banking agency, with the written concurrence of the
FDIC, to determine that the proposed payments would be permissible. The
Bank or the Officer would also have to make certain representations
regarding the Officer's performance of his duties and responsibilities
vis-a-vis the Bank (breach of trust or fiduciary duty, insider abuse,
responsibility for causing the Bank to be in a troubled condition) and
whether he has committed any violations of applicable federal or state
banking laws or regulations. See section 359.4(a)(4)(i)--(iv).
You have included as another attachment to your letter a copy of a
letter from the OCC's Southeastern District office, dated October 31,
1996, which states that the OCC "will not interpose any objection to
the terms of this [A]greement." However, in order to satisfy fully
the terms of section 359.4(a)(1), the Bank or the Officer would have to
submit a written request to the appropriate FDIC Regional Office to
obtain the FDIC's written concurrence
{{2-27-98 p.4984.05}}that the payment of the
Officer's accrued sick leave and comp time by the Bank would be
permissible. The decision to pursue this course of action must be made
by the Bank and its Shareholder, and is independent of the
determinations made herein. In the alternative, the Officer can elect
to make this request pursuant to section 359.4(a)(1) and -(a)(4) on his
own initiative.
Conclusion
In summation, the policies set forth in the Bank's Manual serve as
the basis for a "nondiscriminatory severance pay plan or
arrangement" pursuant to the exception found at section
359.1(f)(2)(v). In accordance with those policies, the Bank would be
authorized to make payment to the Officer for the accrued vacation
time. However, in order to pay the Officer for the accrued sick leave
and comp time which are additional components of the compensation
package provided by the Agreement, the Bank (or the Officer) must
submit an additional request to the FDIC's Regional Officer under
section 359.4(a)(1) for its consideration and concurrence.
I trust that this discussion is responsive to your inquiry. Please
feel free to call me if you have any further questions regarding this
matter. This opinion is based solely upon the facts presented to the
FDIC in your letter and the accompanying attachments. We reserve the
right to review this conclusion if there is any material change in the
facts and circumstances from those set forth
above.
1Hereinafter, all references to sections will be to 12 C.F.R.
unless otherwise noted. Therefore, this portion of subsequent citations
will be omitted. Go Back to Text
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