Restrictions on Compensation Under the CARES Act

Restrictions on Compensation Under the CARES Act

INSIGHTi
Restrictions on Compensation Under the
CARES Act
June 12, 2020
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136) was enacted to
assist those affected by the economic impact of Coronavirus Disease 2019 (COVID-19). A key part of this
assistance is provided to eligible businesses, states, and municipalities in Division A, Title IV of the act.
Section 4003 al ocates $500 bil ion to the Department of the Treasury (Treasury) to make loans or loan
guarantees to certain industries and to support Federal Reserve lending facilities. Section 4112 al ocates
$32 bil ion to Treasury to provide financial assistance to the aviation industry for employee wages,
salaries, and benefits. Some have characterized these provisions as a “bailout” of private industry; others
assert they are necessary to avoid employment losses and maintain economic stability. For more
information, see CRS Report R46329, Treasury and Federal Reserve Financial Assistance in Title IV of
the CARES Act (P.L. 116-136), coordinated by Andrew P. Scott.
Recipient firms of this financial assistance must meet a number of requirements. In some cases, these
include restrictions on compensation at firms receiving assistance under Title IV of the act. This Insight
gives an overview of those restrictions.
Treasury and Federal Reserve Programs Subject to
Compensation Restrictions
In Section 4003, Congress made direct Treasury support available to three sectors that it deemed
particularly in need of such support. This provision makes available up to $46 bil ion for federal loans and
loan guarantees directly from Treasury to the aviation sector and to businesses critical to maintaining
national security. The $46 bil ion is apportioned as follows:
 up to $25 bil ion available to passenger airlines,
 up to $4 bil ion to cargo airlines, and
 up to $17 bil ion to businesses critical to maintaining national security.
This assistance is subject to the compensation restrictions prescribed in Section 4004.
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Of the $500 bil ion, Treasury can make the remainder—up to $454 bil ion, plus whatever is not used to
assist the specified industries—available to the Federal Reserve. The Federal Reserve created the Main
Street Lending Program (MSLP) based on its existing authority and funds made available through the
CARES Act. The MSLP acquires five-year loans made by banks and credit unions to businesses with up
to 15,000 employees or annual revenues of up to $5 bil ion. The authority to enter into new transactions
under the aforementioned Treasury and Federal Reserve programs terminates on December 31, 2020.
MSLP assistance is also subject to the compensation restrictions in Section 4004.
Section 4112 makes an additional $32 bil ion available to Treasury to provide payroll support to the
aviation industry. The payroll support authorization terminates on September 30, 2020. The $32 bil ion is
apportioned as follows:
 up to $25 bil ion available to passenger airlines,
 up to $4 bil ion to cargo airlines, and
 up to $3 bil ion to aviation contractors.
This assistance is subject to the compensation restrictions in Section 4116, which are similar to the
Section 4004 compensation restrictions.
Compensation Restrictions
As previously discussed, under Section 4003, firms receiving direct Treasury support are in the passenger
and cargo aviation sectors and businesses critical to national security. Through the funding provided by
Section 4003, the MSLP provides support to many other firms. Required compliance with the employee
compensation provisions begins when a company’s loan or loan guarantee agreement with Treasury is
executed and ends one year after the date on which the loan or loan guarantee is no longer outstanding
(the covered period). Al are subject to Section 4004 compensation restrictions as follows:
 Compensation over $425,000. Except for employees covered by collective bargaining
agreements, no officer or employee of the business whose total compensation (including,
but not limited to, salary, bonuses, and awards of stock) exceeded $425,000 in the
calendar year 2019 may receive
o total compensation, during any 12 consecutive months of the covered period, that
exceeds the total compensation received by that officer or employee from the
business in the calendar year 2019; or
o severance pay or other benefits upon termination of employment that exceed twice
the maximum total compensation received by the officer or employee from the
business in the calendar year 2019.
 Compensation over $3,000,000. No officer or employee of the business whose total
compensation exceeded $3,000,000 in the calendar year 2019 may receive, during any 12
consecutive months of the covered period, total compensation that exceeds the sum of
o $3,000,000 and
o 50% of the compensation that officer or employee received over $3,000,000 in
2019.
The Treasury Secretary may waive the compensation limits if the Secretary determines “that such waiver
is necessary to protect the interests of the Federal Government.”
Aviation-based firms who receive support under the Section 4112 worker payroll support program are
subject to the compensation restrictions under Section 4116. The compensation requirements are identical

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to the aforementioned requirements for firms under Section 4004—except the Treasury Secretary may not
waive the compensation limits, and the covered period is defined as the “2-year period beginning March
24, 2020, and ending March 24, 2022.” Total compensation for the chief executive officers of the largest
domestic passenger airlines, by revenue, ranged from $3.2 mil ion to $17.3 mil ion in FY2019.
Conceptual y, some have compared the compensation restrictions under Division A, Title IV of the
CARES Act with the pay structures imposed on financial firms whose troubled assets were purchased
under the Troubled Assets Relief Program (TARP). The TARP was established by the Emergency
Economic Stabilization Act of 2008 (EESA; P.L. 110-343) to help return stability to the financial system
during the 2007-2009 financial crisis. Its executive compensation requirements were strengthened in the
American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). Al TARP recipients were subject
to executive compensation restrictions under EESA and ARRA until they satisfied their obligations to
Treasury and exited the program. For example, financial institutions were prohibited from using a tax
deduction for compensation in excess of $500,000.

Author Information

Gary Shorter
Raj Gnanarajah
Specialist in Financial Economics
Analyst in Financial Economics

Disclaimer
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