According to news reports, Congress just approved a final version of the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (CARES Act) and sent it to President Trump. The government is offering money, but, as was the case with the Troubled Asset Repurchase Program (TARP)*, there are many heavy “strings” attached. Two of the provisions of the CARES Act impose certain limits on executive compensation paid by businesses that receive loans, loan assistance, or other financial assistance under Section 4003 of the Act (Different rules and limits apply to companies seeking relief under the Paycheck Protection Program established by Title I of the CARES Act). As a condition of receiving a loan or loan guarantee under the CARES Act, an eligible business must agree that it will comply with the following two conditions for a period (the “covered period”) beginning on the date the loan or guarantee agreement is entered into, and ending one year after the loan or guarantee is no longer outstanding (Section 4004):
- No officer or employee of the business who received aggregate base salary, bonuses, awards of stock, and other financial benefits (“total compensation”) that exceeded $425,000 in calendar year 2019 may receive:
- total compensation exceeding such calendar year 2019 compensation over any consecutive 12 months of the covered period, or
- severance benefits exceeding more than two times such calendar year 2019 compensation; and
- To the extent any officer or employee of the business had total compensation that exceeded $3 million in calendar year 2019, then during any consecutive 12 months of the covered period, such employee or officer may not receive total compensation that exceeds the sum of:
- $3 million, plus
- 50% of the excess over $3 million of the total compensation received by the officer or employee in calendar year 2019.
Air carriers or contractors receiving other financial relief under the “air carrier worker support” provisions of the CARES Act are subject to the broader eligible business compensation limit described above except that the covered period is the two-year period ending on March 24, 2022.
According to my colleagues Ariane Andrade, Nyron Persaud, and Joe Adams, companies receiving assistance under the Act will need to quickly identify which of their employees are subject to the compensation limits in the CARES Act and then determine the aggregate 2019 compensation for each such employee to serve as the baseline. The CARES Act is silent as to whether the value of non-cash benefits like stock awards should be assessed for purposes of the limits at the time of grant or at the time of vesting, which, without additional guidance, may complicate that determination. In addition, the application of the limits is unclear with respect to employees who commenced employment following 2019 and for employees who received compensation for only a portion of 2019. Going forward, these companies will need to implement procedures to track – and limit – compensation paid to covered employees; that process could be tricky in light of the need to apply the limit on a rolling 12-month basis during the covered period
Additionally, companies receiving assistance may not pay stockholder dividends or engage in stockholder buybacks while a loan is outstanding.
Finally, an eligible business with between 500 and 10,000 employees that receives a direct loan must certify that (i) the funds it receives will be used to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020, (ii) it intends to restore not less than 90% of its workforce as of February 1, 2020, and restore all compensation and benefits to the workers no later than 4 months after the termination date of the public health emergency declared, (iii) it will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan, and (iv) it will remain neutral in any union organizing effort for the term of the loan. (Section 4003(c)(3)(D))
*Readers who followed the blog back in 2008-2009 will recall many postings on the executive compensation provisions applicable to financial institutions under TARP, which was part of the Emergency Economic Stabilization Act of 2008 (EESA) signed by President Bush in 2008 and the American Recovery and Reinvestment Act (ARRA) signed by President Obama in 2009. As we predicted at the time, many of the TARP restrictions ended up being included in the Dodd-Frank Act and applicable to all companies.