COVID-19 and Executive Compensation

Section 4004 of the Coronavirus Aid, Relief, and Economic Security Act or the CARES Act imposes limits on executive compensation paid by eligible businesses that receive loans, loan guarantees, or other financial assistance of up to $500 billion in the aggregate under Section 4003 of the CARES Act. As a condition of receiving a loan or a loan guarantee under Section 4003, an eligible business must agree that it will comply with two conditions for the period beginning on the date the loan or loan guarantee agreement is executed and ending one year after the loan or loan guarantee is no longer outstanding.

Section 4004(a) provides that the first condition is that no officer or employee of the eligible business whose total compensation exceeded $425,000 in 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) will receive from the eligible business: (i) 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 2019, or (ii) severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in 2019.

The second condition is that no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of: (i) $3,000,000, and (ii) 50% of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in 2019.

Section 4004(b) defines the term “total compensation” 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.

Air carriers or contractors receiving other financial relief under the “Air Carrier Worker Support” provisions of the CARES Act to preserve aviation jobs and compensate air carrier industry workers are generally subject to the eligible business compensation limits described above except that the period involved is a two-year period ending on March 24, 2022.

The CARES Act does not discuss whether the value of non-cash benefits like stock options and stock appreciation rights should be considered for purposes of the limits at the time of grant or at the time of vesting. Additionally, the limits do not discuss whether they apply to employees who commenced employment following 2019.

Companies will need to implement procedures to track – and limit – compensation paid to affected employees.

Companies may also need to consider adding “force majeure” clauses in executive compensation contracts, to provide for additional deferrals, extending deferral periods, or otherwise permit changes in compensation during unforeseeable catastrophic circumstances. However, drafting language to discuss force majeure would be tricky, the language should be reasonable, not overly broad, objectively determinable, and in compliance with the deferred compensation requirements of Section 409 of the Internal Revenue Code.