Skip to main content
Article | Executive Pay Memo North America

Main Street loans include CAREs Act pay restrictions

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Gary Chase and Steve Seelig | June 17, 2020

Guidance provided for new employees and those whose pay exceeds CARES Act limits during loan term.

On June 15, the Federal Reserve opened its Main Street Lending Program for companies with up to $5 billion in revenue and up to 15,000 employees, which will include the executive pay, employee retention, stock buyback and dividend limits embodied in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

We’ve previously written about the executive pay and employee retention provisions of the CARES Act that, until now, were only applicable to airlines and air cargo companies that received loans under its provisions. The Federal Reserve continues to provide updates on what is called the Main Street Loan Facilities that apply to small and midsize companies with up to $5 billion in revenue and up to 15,000 employees. Details on how to apply for these loans, a comprehensive FAQ and the certification that borrowers must sign can all be found at the above link.

We have been hoping for a bit more information on the executive pay restrictions of the program, as companies are otherwise left to interpret for themselves how to address certain issues. For example, the current guidance does not address how to define total compensation when applying the two tiers of executive compensation restrictions (no pay increase for employees or officers with total compensation of between $425,000 and $3 million in 2019, and for those above $3 million in 2019, a 50% haircut on pay received in 2019 over that level) during any consecutive 12-month period of the loan period until 12 months after the loan is settled. Absent guidance, our view remains that companies should consider following the Summary Compensation Table definition of total compensation in applying these limits.

However, the recently published Borrower Certifications and Covenants Instructions and Guidance for the Main Street Lending Program loan facilities (see the documentation for the Main Street Priority Loan Facility) includes information on how the 2019 limit is applied to employees hired after January 1, 2019, and to officers or employees who become highly compensated during a 12-month period that ends after 2019. The statute did not specify how to deal with those types of situations, which could have resulted in some highly compensated employees and officers avoiding the compensation restrictions while unnecessarily limiting the compensation of others. To address these issues, the certifications clarify that for employees who started work in 2019 or who become highly compensated after 2019, the base period to determine if the pay thresholds of $425,000 or $3 million are exceeded is something called the “Subsequent Reference Period”.

  1. For an officer or employee who started employment during 2019 or later, the “Subsequent Reference Period” is the 12-month period starting from the end of the month in which the officer or employee commenced employment.
  2. For an officer or employee whose total compensation first exceeds $425,000 during a 12-month period ending after 2019, the “Subsequent Reference Period” is the 12-month period starting from the end of the month in which the officer or employee’s total compensation first exceeds $425,000 (or $3,000,000).

These rules mean careful attention must be paid for a broader set of employees whose pay increases could bring them into the pay-restricted group, but they also may present some opportunities for advance planning.

Officers or employees starting employment during 2019 or later:

The new rule is helpful for employees who started during 2019 but were paid over $425,000 for that partial year. An example will help illustrate.

Let’s assume the company receives its loan on August 1, 2020, and the employee started work on July 15, 2019, subject to a three-year contract that would pay the employee $100,000 per month. Absent this new rule, that person would have had a 2019 pay level of $550,000, which would have been his or her pay limit for any consecutive 12 months during the pay restriction period. Under the new rule, however, that person would be treated as having earned $1.2 million (based on earning $100,000 per month for the 12-month period starting on August 1, 2019), resulting in a pay limit of $1.2 million for any consecutive 12 months during the pay restriction period.

Assume instead the same loan date, but that the employee started work on October 1, 2019, and that the employee’s contract provided for a 10% pay increase in years two and three of the contract. The pay received for the 12 months ending on September 30, 2020, would be counted, which would include pay for August and September 2020. Those two months of pay (including the pay increase that applies to those months) would also count toward that employee’s pay limits measured during any consecutive 12 months of the pay restriction period.

Because the employment contract mandates pay increases, the company may determine it must increase pay levels during August and September to fulfill its contractual obligations to pay this compensation during the Subsequent Reference Period. There would be some tricky math involved, with the notion being that the future annual 10% increases in compensation would be amortized over the remainder of the three-year contract compared with the expected loan term.

The main point here is that the new rule may present some planning opportunities for companies that might otherwise be constrained by the pay limits during the pay restriction period. Counsel should weigh in on whether they believe our reading could violate the loan program’s certifications and covenants.

Officers or employees whose total compensation first exceeds $425,000 during a 12-month period ending after 2019:

For this category of employees, companies will need to monitor pay increases on a monthly basis for employees who are near the $425,000 pay level. Assuming total compensation is based on the Summary Compensation Table definition of total compensation, salary increases, bonuses earned and equity grants made could cause an individual to enter the restricted pay group.

Similar to the above discussion, companies should consider that any pay increases that cause compensation to exceed $425,000 during the final month of any 12-month period would be the last increase permitted for that individual until 12 months after the loan is paid down. Whether it makes sense to give that person a higher pay increase than otherwise contemplated due to those impending pay restrictions is a matter to be discussed with counsel.

Please consult the prior article cited above for additional planning ideas.


Director, Retirement and Executive Compensation

Senior Director, Executive Compensation (Arlington)

Contact Us