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What are the consequences for terminating an executive officer in a firm that has accepted TARP funds?

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A firm that has received TARP funds is certainly within its rights to terminate an executive officer, as long as there's a sound business rationale behind the decision.

However, just as TARP has placed restrictions on executive compensation, it also places restrictions on executive severance payments. Specifically, neither the executive nor the firm can avoid responsibility for paying back bonuses that were based on materially inaccurate data.

In addition, senior executive officers are prohibited from receiving "golden parachute" payments--which effectively means they are not entitled to severance at all (not an issue for lower-level employees).

There are also restrictions on a TARP-recipient firm's payment of bonus or other incentive compensation while the executive officer was employed. This is a very new and highly politicized issue in the area of executive compensation.

Make sure you get solid advice from counsel so that you can avoid becoming embroiled in any "lightning rod" situations.

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