CARES Act Imposes Limits on Executive Pay over $425,000 for Businesses Seeking Financial Assistance

On Friday, March 27, 2020, the $2 trillion assistance package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides a variety of relief programs to companies and, similar to the Troubled Asset Relief Program (“TARP”) implemented during the Great Recession, this government assistance comes with strings attached, including limits on compensation paid to employees.

In general, a business that receives a loan or loan guarantee under Title IV of the CARES Act must agree that, beginning on the date the agreement is executed and ending on the date that is one year after the date the loan or loan guarantee is no longer outstanding (the “covered period”), it will not pay compensation that exceeds the following limits:

• Compensation Over $425,000: no officer or employee of the business whose total compensation exceeded $425,000 in calendar year 2019 will receive:
  • total compensation that exceeds, during any 12 consecutive months of the covered period, the total compensation received by the officer or employee from the business in calendar year 2019; or
  • during the covered period, severance pay or other benefits upon termination of employment that exceeds twice the maximum total compensation received by the officer or employee from the business in calendar year 2019; and
• Compensation Over $3,000,000: no officer or employee of the business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive, during any 12 consecutive months of the covered period, total compensation that exceeds the sum of:
  • $3,000,000; and
  • 50% of the compensation the officer or employee received over $3,000,000 in 2019. [1]

The Act defines “total compensation” to mean salary, bonuses, awards of stock, and other financial benefits provided by a business to an officer or employee of the business.

Next Steps: Businesses seeking to take advantage of the loan or loan guarantee programs will need to quickly identify employees whose compensation is above the limits, and take into account the limits with regard to any employment agreement currently in effect. Businesses will also need to implement a tracking system to ensure the limits are not exceeded during rolling 12-month periods that will not necessarily align with the calendar year or employer’s fiscal year.

Numerous issues will no doubt be addressed with further agency guidance. For instance, the IRS will likely provide additional guidance regarding the meaning of “total compensation,” such as the proper accounting for incentive compensation, the treatment of stock awards, how employees hired mid- or post-2019 are treated, and the meaning of “other financial benefits.” We will provide updates as guidance is released.