The CARES Act imposes certain limitations on compensation payable by businesses that receive loans, loan assistance, or other financial assistance. For Loan Recipients, the compensation limits apply for the period commencing on the date the agreement is executed and ending 1 year from the date that the loan or loan guarantee is no longer outstanding.
Specifically, the Act outlines two separate limitations for employees or officers:
1. Compensation over $425,000: No officers and employees whose total compensation exceeded $425,000 in calendar year 2019 (other than compensation determined through collective bargaining agreements in place prior to March 1, 2020) will receive:
- Total compensation which exceeds, during any 12 consecutive month period, the total compensation received in 2019; or
- Severance pay or other benefits upon termination that exceeds twice the maximum total compensation received in 2019.
2. Compensation over $3,000,000: No officers and employees whose total compensation exceeded $3 million in calendar year 2019 will receive total compensation during any 12 consecutive month period that exceeds the sum of:
- $3 million; and
- 50% of the excess over $3 million of the total compensation received in 2019.
The Act defines “total compensation” as salary, bonuses, awards of stock, and other financial benefits provided by a business.
Additionally, companies receiving assistance cannot pay dividends or engage in share buybacks while a loan is outstanding.
It should be noted that the above compensation limitations are not applicable for companies seeking relief under the Paycheck Protection Program established by Title I of the CARES Act.
Next Steps
The limitations on compensation raise various unanswered questions that will no doubt be addressed in future guidance. For instance, additional guidance will be necessary regarding the determination of “total compensation”, including the appropriate treatment of equity awards, compensation for mid- or post-2019 hires, and the definition of “other financial benefits.”
Companies receiving assistance under the Act will need to:
- Identify which employees or officers are subject to the compensation limits under the CARES Act and determine the aggregate 2019 compensation. Note: until further guidance is available, total compensation estimates from W-2s and where applicable, Summary Compensation Table total values should suffice;
- Review all employment, and severance/change-in-control agreements for employees or officers who exceed the compensation limits; and
- Moving forward, companies should implement a tracking system to ensure that limits are not exceeded during the 12-month rolling period. In cases where employees or officers exceeded the compensation limits for calendar year 2019, companies may wish to consider deferring any compensation that will likely exceed the limitations for 2020.
