The CARES Act authorizes the United States Treasury’s Exchange Stabilization Fund to provide loans, loan guarantees, and other investments to eligible businesses, states, and municipalities that incur losses as a result of the COVID-19 pandemic. To be eligible for this type of CARES Act loan, the eligible business must agree to certain limits on executive pay during the period beginning on the date the loan agreement is executed and ending one year after the loan or loan guarantee is no longer outstanding (the “Limitation Period”). (NOTE: The executive compensation limits do not apply to other CARES Act loan programs, such as the Paycheck Protection Program and the Economic Injury Disaster Loan.)
Executive Compensation Limits
The executive compensation limits are as follows:
- No officer or employee whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined under a collective bargaining agreement entered into before March 1, 2020) may receive:
- during any consecutive (i.e., rolling) 12-month period within the Limitation Period, total compensation that is more than the total compensation the officer or employee received during calendar year 2019; or
- severance pay or other benefits on employment termination that exceeds twice the maximum compensation the officer or employee received during calendar year 2019.
- No officer or employee whose total compensation exceeded $3 million in calendar year 2019 may receive, during any consecutive (i.e., rolling) 12-month period within the Limitation Period, total compensation in excess of the sum of:
- $3 million; plus
- 50% of the excess over $3 million of the total compensation the officer or employee received during calendar year 2019.
For example, if an executive made $5 million in 2019, compensation for 2020 would be limited to $4 million ($3 million + $1 million [50% of $2 million]).
Total compensation for these rules includes salary, bonuses, stock awards, and other “financial benefits.”
Interpretive Issues
These provisions raise a number of interpretive issues, particularly around the definition of “total compensation.” Hopefully, the IRS will issue guidance soon. Some questions to consider include:
- What is a “financial benefit” and how should it be valued?
- Can certain types of compensation be excluded?
- When are equity awards and deferred compensation considered to be received?
- How should employees hired during 2019 and 2020 be treated?
- What if the officer or employee has an employment agreement for compensation over these limits?
Implications for Employers
Employers that want to take advantage of these loan programs need to:
- Identify those officers or employees whose pay will be restricted by the executive compensation limits;
- Determine the impact of the executive compensation limits on any outstanding employment agreements (may need to renegotiate some agreements);
- For each officer or employee subject to the compensation restrictions, track pay to ensure the rolling 12-months compensation limit is not exceeded at any time during the Limitation Period; and
- Make good faith interpretations of how to implement these executive compensation limits and carefully document the reasoning behind those decisions.
Visit Warner’s COVID Resource Center.
Warner is here to help! If you need assistance with implementing the CARES Act provisions, please contact a member of Warner’s Employee Benefits and Executive Compensation Practice Group.
