This is the third and final installment of the effects of Covid-19 Pandemic (Pandemic) on executive compensation of private companies.  Part 1 discussed the issues of reducing compensation of Executives.  See Part 1.   Part 2 discussed issues with deferred compensation plans of Executives.  See Part 2.  This Part 3 deals with limits on compensation for businesses that avail themselves of certain relief provided under the Coronavirus Aid Relief and Economic Security (CARES) Act.  The CARES Act was signed into law by President Trump on March 27, and provided $2 trillion in emergency aid to businesses, families and individuals affected by the Pandemic. The Paycheck Protection Program (PPP) has received the most press as it is a program to provide forgiveable loans for small businesses, with less than 500 employees, to keep their employees on payroll.  While the PPP has some restrictions on compensation, the Coronavirus Economic Stabilization Act (CESA) provisions of the CARES Act impose stricter limits on businesses that obtain relief under the Main Street Lending Program.  Both limits are discussed below.

PPP Limits.  Employers that receive PPP forgivable loans are limited in their use of such funds in order for such loans to be forgiven. For example, the combined total of salary and other wages that may be paid to any one employee is capped at $100,000 on an annualized basis. Employee benefits such as paid leave, separation pay, health and other insurance premiums, and retirement contributions are not included in calculating the limit.

Additionally, the PPP’s loan forgiveness is tied to: using the loan for forgivable costs (payroll, mortgage interest, rent, utilities) in proper ratios; maintaining employees by retention or timely re-hire; and ensuring the wages of no employees who earned less than $100,000 in 2019 are reduced by more than 25%.  If this occurs, the amount of the loan that will be forgiven is reduced.  Importantly, hourly paid employees are not considered to have wages reduced if they are paid less on account of hours being reduced.  Because there is no forgiveness penalty for reducing the compensation of highly compensated employees, the PPP actually creates an incentive for employers to reduce Executive salaries over those of employees that made under $100,000 in 2019.  However, employers must take into consideration any contractual rights an Executive may have.  See Part 1.

Also, it should be noted that changes made by the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020, makes it easier for employers to avoid any reduction in forgiveness by tripling the period for the borrower to incur forgivable costs from eight weeks to twenty-four.

CESA limits.  Under the CESA provisions of the CARES Act, certain specialized industries (such as airlines and businesses critical to maintaining national security) as well as other businesses with between 500 and 10,000 employees can receive a loan or loan guarantee under the Main Street Lending Program. The minimum loan is $1 million and they are not forgiveable as under the PPP.  Any business receiving such a loan is subject to limits on compensation. The restrictions apply during the period beginning on the date the loan agreement is executed and ending one year after the loan or loan guarantee is no longer outstanding (Restriction Period).

The restrictions prevent officers or employees whose 2019 total compensation exceeded $425,000 from earning any more than earned in 2019 during any 12 consecutive months in the Restriction Period. Those with total compensation in excess of $3,000,000 in 2019 actually can’t earn as much as in 2019. Their excess over $3,000,000 is restricted to 50% of the amount earned in excess of $3,000,000 in 2019.  Additionally, no officer or employee may receive severance pay or other benefits upon termination of employment which exceeds twice the total compensation received in 2019. Borrowers under the Main Street Loan Program must attest that they will follow the compensation restrictions in order to receive their loan and the restrictions are contained in loan covenants.

Presumably, if an Executive is scheduled to receive 2020 compensation that would violate the restrictions, the employer will obtain a waiver of the excess compensation or other agreement to the restrictions from the Executive as part of the application process.

There are a number of questions regarding these restrictions that must still be answered by guidance. These include: are the restrictions imposed on a controlled group basis? What are the consequences for exceeding the limits? How is total compensation measured? Can compensation be deferred until after the Restriction Period? How to apply the restrictions to pre-existing employment agreements? Do the restrictions apply to new hires who weren’t employed in 2019? Hopefully, we will get guidance from the Treasury Department and Federal Reserve Board soon that will answer these questions.

Conclusion.  Businesses availing themselves of the relief afforded under the PPP or CESA provisions of the CARES Act must be cognizant of the effect on all compensation, including that of Executives.  Employers should also have a strategy to ensure compliance.

These three articles have demonstrated that there are a number of factors to consider when desiring to change the compensation of Executives as a result of the Pandemic.  As the personnel chiefly responsible for keeping an employer in business during these trying economic times, Executives remain highly valuable to their employers.  However, they should also be fully aware that changes may be necessary to ensure survival of the business.  Employers and Executives should consult with legal counsel regarding any proposed changes in response to the Pandemic.