Organizations will require further clarification; Gallagher will continue to monitor the evolving guidance
The “CARES Act” (the Act) includes provisions only for those organizations that receive financial support through loan guarantees from the US Treasury's Exchange Stabilization Fund under Title IV of the Act. These restrictions do not apply to organizations that receive funds ($100 billion) specifically designated to aid healthcare organizations impacted directly by COVID-19. Gallagher’s HR & Compensation Consulting practice prepared the following summary, with opinion comments bolded:
Executive Compensation Restrictions
For officers and employees who earned greater than $425,000 in total compensation during calendar year 2019, total compensation earned during any 12 consecutive months within the restricted period cannot exceed calendar year 2019 total compensation.
- - Total compensation is defined as “salary, bonuses, awards of stock, and any other financial benefit.”
- “Other financial benefit” likely includes vesting in or receiving benefits from deferred compensation plans and other items. The definition of “compensation” creates questions and requires further clarification.
- - The restricted period is defined as beginning on the date on which the agreement was executed and ending on the date one year after the date on which the loan or loan guarantee no longer is outstanding (represents a compensation freeze for two years if paid back one year after loan agreement execution).
- - The Act does not include employees covered under a collective bargaining agreement.
The new Act imposes restriction on severance pay or other retirement benefits upon termination of employment that exceeds twice the total compensation received in calendar year 2019.
- - The severance timing and guidance on how to negotiate and manage already established agreements is unclear per the Act, and requires further clarification.
No officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019 may receive total compensation during any 12 consecutive months within the applicable period greater than the sum of $3,000,000 + 50% of the excess over $3,000,000 of total compensation received in calendar year 2019.
- - For example, an employee receiving $4,000,000 in 2019 cannot receive more than $3,500,000 ($3,000,000 plus 50% of $1,000,000) in any 12-month stretch during the restricted period.
Organizations Will Need More Clarification
Please note: There are a significant number of questions related to the impact on executive compensation arrangements and administration of these restrictions that require guidance. Gallagher continues to monitor this closely and we expect additional clarification to follow. These are just a few questions we are hearing:
How do the restrictions apply to post-2019 hires and / or mid-2019 hires?
What is total compensation and how do we calculate it under the provision? Does it include benefit values, life insurance premiums, and social security contributions?
How will deferred compensation and equity grants be treated? Grant date? Vesting date? Paid date?
How do the restrictions apply to employees of related organizations?
How does an organization negotiate with an executive who was promised severance or other benefits if those benefits would violate the Act? Section 409A would place limitations on adjusting deferred compensation set to be paid. Will Section 409A rules be modified?
Will an employee operating as a contractor, non-employee director, partner or independent contractor be considered a covered employee?
How will the restrictive compensation provisions be enforced?
- The Administration is forming a “Pandemic Response Accountability Committee” “to promote transparency and support oversight of funds provided in this Act.” The Committee will set up a website that publicly reports data on how the Treasury allocates funds.
Consider these Immediate Next Steps:
1. If your organization is considering applying for a loan from the Exchange Stabilization Fund, you should calculate calendar year 2019 compensation paid to executives greater than $425,000 and $3,000,000. (A good place to start would be W2 reported compensation for 2019; however, this may not be the final total compensation calculation considered under the CARES Act.)
- Understand caps for any consecutive 12 months within the restricted period (two years)
2. Review severance agreements and identify any that exceed the CARES act limit of twice total compensation in 2019
3. Identify any deferred compensation arrangements that could vest and be paid during the restricted period (retirement plans, retention agreements, special bonuses, long-term incentive plans, etc.)
4. Continue to communicate closely with Gallagher as we monitor developments related to the Act
5. Connect with your legal counsel and confirm your organization’s interpretation of the Act’s guidance
We at Gallagher are happy to discuss any questions to help you support the overall wellbeing of your organization.
This information is based on Gallagher’s interpretation of the status of current laws and guidance. However, the communication is not legal advice. Any organization that makes decisions on the issues set out in this communication needs to do so under the advice of its own legal counsel.
Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.