Report on Non-Deductible Pay by TARP Companies

2010 – Fifth Third Bancorp

 

 

RESOLVED: The stockholders of Fifth Third Bancorp (the “Company”) hereby request that the Board of Directors (“Board”) report annually on the extent to which the application of Section 162(m) of the Internal Revenue Code resulted in some or all of the remuneration of the Company’s senior executives being non-deductible for federal income tax purposes, how much money the payment of non-deductible pay is costing our Company in higher taxes, and the rationale for paying such non-deductible compensation to senior executives.

      

Supporting Statement: Our Company is one of the financial institutions that received financial assistance under the U.S. Treasury Department’s Troubled Asset Relief Program (“TARP”), which sought to inject liquidity into the financial system and to revive the credit markets.  Some institutions have repaid these funds, but our Company had not at the time this proposal was submitted.

 

In the ongoing debate over the bailout of financial institutions, critics noted that these companies’ compensation programs created perverse incentives for executives to focus on short-term results, even if those results were ultimately not in the companies’ long-term interests.  Congress responded by establishing standards restricting the executive compensation at institutions receiving TARP funds.

 

One such standard limits the tax-deductible compensation that a company receiving TARP funds may pay to each executive at $500,000 per year.  Companies receiving TARP funds may pay executives compensation in excess of $500,000, but doing so may increase the company’s income taxes and affect its bottom line and thus affect stockholder returns.

 

We are concerned that, even with this standard, many financial institutions are reverting to their pre-crisis compensation practices for their Named Executive Officers. (“NEOs.”)  A September 2009 study by the Institute for Policy Studies underscores this issue.  The report found that the CEOs of the 20 banks that received the most TARP funds were paid 37% more than the average for top executives at S&P 500 companies the preceding year.

 

Although Congress permits TARP participants to pay non-deductible compensation to their executives, we believe that stockholders have the right to know the specific financial implications to the Company of a decision by the Board to pay senior executives more than the applicable deduction limit, as well as the Board’s rationale for doing so.

 

On September 24, the Board of our Company approved increasing the 2009 base salary for CEO Kevin Kabat to $3.14 million from $900,000 in 2008 in cash and phantom stock units, and approved similar awards increasing the base pay for the other NEOs.  We request that the Board explain why it approved compensation in excess of the Internal Revenue Code 162(m) deduction limits, and report how much this cost the Company in additional taxes.

 

We urge you to vote FOR this resolution.