The two-trillion dollar Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” signed into law on March 27, 2020 includes $500 billion for loans to distressed businesses. Title IV of the CARES Act, the Coronoavirus Economic Stabilization Act of 2020 (“CESA” or “Act“), sets forth the requirements for companies to be eligible for this aid. One of the conditions for federal financial assistance to which businesses must adhere is a limitation on executive compensation.
Section 4004 of CESA states that the Department of the Treasury may only enter into a loan agreement with a company if the business also enters into a legally binding agreement (“Agreement”) with the Secretary of the Treasury regarding compensation and severance. The restrictions of this Agreement are to remain in place for the duration of the loan and for one year after the loan is paid off. The Agreement must state that, “no officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019” will receive “total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019.” In other words, no covered executive can get a raise during the restriction period.
Another provision of the Act could even decrease compensation for certain highly compensated employees. It requires a covered business to include in their Agreement that any employee whose total compensation exceeded $3,000,000 in 2019 may not receive compensation greater than $3,000,000 plus 50 percent of the amount that his or her 2019 compensation exceeded that amount.
Finally, the Agreement must also state that during the restriction period no high-level employee will receive severance pay or other benefits upon termination of employment that exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019.
“Total compensation” is defined to include “salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.”
It is not clear how certain types of retirement plans will be affected by the Act. The restrictions do not seem to apply to new hires or any employee who was not employed by the company in 2019.
This is not the first time federal aid has been conditioned on limitations on executive pay. The Troubled Asset Relief Program (“TARP”) of 2008 also included restrictions on compensation and golden parachutes for executives of the financial institutions that received assistance.
If you have questions about executive compensation, contact the executive law attorneys at Trepanier MacGillis Battina P.A.
Trepanier MacGillis Battina P.A. is an executive law firm located in Minneapolis, Minnesota. Their executive law attorneys can be reached at 612.455.0500.