Compensation Impact on Taking Money from the Government (CARES Act HEC)

The key language regarding compensation in the CARES is below. How will this affect hospitality, gaming and travel companies who participate?

To receive financial assistance (in the case of air carriers and contractors), or loans and loan guarantees (in the case of other eligible businesses), a company must agree to the following limits (which generally apply during the period of assistance and for one year thereafter) on annual compensation and severance payments for each officer and other employee (other than a unionized employee) whose “total compensation” exceeded $425,000 in 2019 (“CARES Act HCEs”):

  • Each such individual cannot receive total compensation during any 12 consecutive months in excess of the lesser of:
  • the total compensation received by the individual in 2019; and
  • the sum of (i) $3,000,000; and (ii) 50% of the amount that the individual’s total compensation in 2019 exceeded $3,000,000.
  • Severance pay or other benefits upon termination of employment cannot exceed two times the maximum total compensation received by the CARES Act HCE in calendar year 2019.

For small private and public companies, the impact will be minimal. Besides owners and principals of small companies, very few people in hospitality made more than the $425,000 threshold in 2019. Even fewer made more than $3M. For mid and large-cap companies the impact will be more pronounced. Based on our survey data, we estimate that approximately 8-10% of the workforce at these organizations would be impacted. But most will fall between $425K and $3M and could be paid at 2019 levels (a highwater mark for many in the industry). The real impact and focus of the provision are on the highly compensated executives. Take Arne Sorenson at Marriott for example: he makes about $13M a year. If Marriott takes money under the Act, he would be capped at earning ($3M + 50% of the $10M in excess of his yearly compensation = $8M). That cap would be in place for any year the loan is in force and in the year following repayment.

We suspect no one will feel sorry for this group, but the government did something similar during the financial crisis and it did have consequences. Financial institutions that took money saw a significant migration of talent to other financial platforms (hedge funds, private equity and family office) to avoid the compensation restrictions. Talent also moved to less restrictive industries and a dearth of entrepreneurs were born. It will be very interesting to see how the CARES Act fine print will impact our future.

 
 

Keith Kefgen, New York
CEO & Managing Director


[email protected]


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