CARES Act: Compensation Restrictions Echo TARP, With Several Key Differences

March 27, 2020

The CARES Act contains executive compensation stipulations for companies that receive aid, including restrictions on pay and benefits, repurchasing shares, and paying dividends.

While the compensation restrictions are fairly uniform, there are some noteworthy differences that depend on market sector and the type of aid received.

For companies accepting loans, the following restrictions apply from the date a company accepts aid until 12 months after the date the loan is repaid:

  • Total compensation and severance:  Compensation for employees who earned $425,000 or more in total compensation for 2019 can’t exceed 2019 pay in any 12-month period until 12 months after the loan is repaid.  Severance benefits for those individuals are capped at 2 times 2019 total compensation.  Total compensation is defined as “salary, bonuses, awards of stock, and other financial benefits.”

  • Special limits for highly paid executives:  No officer or employee who received more than $3 million in total compensation for 2019 may receive in any 12-month period more than $3 million + 50% of the amount over $3.0 million in 2019.  For example, if a CEO received $5.0 million in 2019 total pay, for any 12-month period while receiving aid and one year after repayment, the CEO’s total pay is capped at $4.0 million ($3 million + (($5 million - $3 million) x .5)).

  • Buybacks and dividends prohibited:  Companies receiving aid are prohibited from repurchasing shares or paying dividends until 12 months after the loans are repaid.

  • Potential waivers:  For most companies receiving loans, the Treasury Secretary can waive the above requirements if he “deems it necessary,” but will have to justify this to Congress.  If an aid recipient is an air carrier (including its suppliers, caterers, techs/mechanics), air cargo company, or company critical to national security, the Secretary will not be able to waive any provisions restricting compensation, buybacks, or dividends. 

  • Special aid for air carriers:  Air carriers are also eligible for federal financial aid (not a loan) for the specific purpose of maintaining their workforces.  In this case, the above restrictions would apply from March 2020 – March 2022, but the Treasury Secretary would not be able to waive any provisions.

Comparison with TARP:  The restrictions on compensation differ notably from the restrictions used under previous federal economic stimuli, such as TARP.  There are no prohibitions on a specific form of compensation, such as cash bonuses, but the restrictions are also not scaled by the amount of aid received and will continue for one year following loan repayment, unlike TARP.

Why it's important:  Companies receiving aid may find some challenges adjusting their compensation schedules to the new restrictions as equity grants and short-term incentives may have already been communicated to employees.  Overall, it is concerning that the public discussion on aid to the private sector has generally equated executive compensation and share buybacks, effectively lumping together corporate executives and shareholders.  HR Policy Association and the Center On Executive Compensation will continue to monitor and engage on the ultimate implementation of the final bill.