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Alert: The CARES Act and Executive Compensation

Most Americans are starting to feel the waves of changes the Coronavirus (COVID-19) has brought to the economy. With concerns over unemployment, loan defaults, and failing businesses the U.S Senate passed the country’s largest one-time spending bill known as the Coronavirus Aid, Relief and Economic Security, or “CARES,” Act. This bill will bring into effect many economic and financial relief factors designed to support the American economy while the country navigates the pandemic.

Considering this is a $2-trillion dollar package coupled with major activity from the Federal Reserve it appears that not all are confident in the ability to recover quickly. The worry and concern of a grim economic environment in the coming months is real, as evidenced by the spiking numbers of unemployment claims recently highlighted in the media. And while the CARES Act addresses a wide range of needs for the economy, there are a number of provisions attached to the financial relief tools that have specific focus on executive compensation. The article we reference below highlights these items, but we will quickly summarize below. Please note the following applies only to companies that choose to receive assistance: 

  • Total compensation for any employee that made more than $425,000 in 2019 will be capped at that level.
  • Executives paid more than $3 million in 2019 will see a cap on compensation to the effect of the $3 million plus half of the incremental compensation above $3 million. So, if an executive made $4 million in 2019, that individual would be capped at $3.5 million during the restriction period.
  •  Severance pay will also be impacted and limited to double the executive’s 2019 total compensation.

The limitations included in the legislation are not surprising given the current political landscape, the bright spotlight on executive pay and corporate governance, and precedent set back during the global financial crisis from TARP. However, there are a number of issues within the CARES Act impacting executive compensation that need unpacking. 

If you’ve had the time to read the applicable language within the legislation (highly recommend it if you need something to help pass the quarantine time!), then you likely will come up with the same question we’ve had: what is the definition of total compensation? If you are a compensation practitioner, then you, like us, will be looking for more guidance defining what they mean by “base salary”, “bonus”, “stock awards” and “other financial benefits.” Target values, values paid during the year, values earned during the year, stock granted or received? The list of possibilities goes on.

Ambiguity shows up again in the definition of severance, such that the cap refers to a payment of severance and “other benefits.” More guidance will be helpful here as well.

Lastly, while we understand the philosophical intent of the limitations accompanying financial relief from government coffers is to prevent misappropriation of such funds for executive self-interest, we feel such limits will make it more challenging for companies to achieve the typical philosophical goals of executive compensation programs to attract, motivate and retain the right talent needed to drive their businesses through these turbulent times. It inhibits a company’s ability to attract talent by limiting how much compensation can be paid during the restriction period (or does it, because the language does not opine on limitations for employees hired after 2019). It also inhibits a company’s ability to retain and motivate talent in situations where executives will be capped from future earnings potential or potentially see their compensation reduced!

While this may sound self-serving, it might be wise for the government to consider hiring outside expertise with a better knowledge of executive compensation the next time it explores legislation with strings attached designed to throttle compensation practices. We will keep an eye out for updated guidance released and share any follow up thoughts as appropriate.

See the above mentioned article: “What the $2 trillion coronavirus relief bill means for you”