Executive Compensation Restrictions for Companies Receiving Federal Loans Under the CARES Act

One of the most memorable dialogues in Casablanca occurs when Rick (played by Humphrey Bogart) tells Ugarte (played by Peter Lorre) that when Ugarte procures exit visas for refugees, he does so “for a price.” Similarly, under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”), employers that procure federal loans or loan guarantees from the U.S. Treasury’s Exchange Stabilization Fund will do so for the price of restrictions on the compensation of their executives.

The restrictions apply to employers that receive loans and loan guarantees from the U.S Treasury’s Exchange Stabilization Fund under Title IV of the CARES Act. Any employer, whether taxable or tax-exempt, publicly traded or privately held, can participate in the Exchange Stabilization Fund; employers receiving financial assistance from the Paycheck Protection Program under Title I of the CARES Act are not subject to the restrictions. The restrictions apply from the date that the loan or guarantee agreement is entered into and end one year after the loan is repaid (the “Restricted Period”). For air carriers and contractors receiving benefits under the air carrier worker support provisions of the CARES Act, the Restricted Period is the two-year period ending on March 24, 2022.

The restrictions impose the following caps on the compensation paid to officers and employees during any consecutive twelve months in the Restricted Period:

• If the individual’s total compensation received in calendar year 2019 exceeded $425,000, his or her total compensation is capped at the amount received in 2019.
• If the individual’s total compensation received in calendar year 2019 exceeded $3 million, his or her total compensation is capped at $3 million plus 50 percent of the amount over $3 million received in 2019. For example, if an individual’s total compensation in 2019 was $3.5 million, the cap is $3.25 million during any consecutive twelve months in the Restricted Period.

Since total compensation is calculated on rolling consecutive twelve month periods, it appears that employers must perform calculations every month during the Restricted Period.

In addition, severance pay and other benefits are capped at two times the maximum total compensation for calendar year 2019. For example, if an employee’s total compensation was $1 million in 2019, his or her severance pay and other benefits are capped at $2 million. It is likely accelerated vesting of equity awards on an involuntary termination without cause or a voluntary termination for good reason will be treated as other benefits subject to the cap. It is unclear whether the cap applies to terminations of employment during the Restricted Period or to severance pay and other benefits received during the Restricted Period.

Under these rules, the lynchpin of the analysis is the definition of total compensation. The CARES Act defines total compensation broadly to mean salary, bonuses, stock awards, and other financial benefits. Other financial benefits likely include employer contributions to 401(k) plans and nonqualified deferred compensation plans, pension values, and perquisites. They should not include gains on the exercise of options and the sale of other vested equity. The CARES Act is silent as to whether stock awards are to be valued at the grant date or the vesting date. It is also silent on the treatment of employees who received compensation for only a portion of 2019, such as 2019 new hires, and employees who began employment after 2019.

Employers subject to these restrictions should review their executive employment agreements and severance plans to see if they need to be amended to satisfy these restrictions. Amending individual employment agreements will likely require the employee’s consent and perhaps the payment of additional consideration that is included in total compensation. If a severance plan reserves to the employer the right in its exclusive discretion to amend or terminate the plan, or to reduce benefits under the plan, the consent of affected participants may not be necessary. Furthermore, it is unclear which items of compensation are to be reduced to comply with the restrictions, and whether the employee has any say in the order of reduction.

For more information, please do not hesitate to contact Steven Sholk, a Director in the Gibbons Corporate Department.

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