COVID-19: Compensation Considerations and New CARES Act Provisions

This alert was updated on April 2, 2020, with respect to the CARES Act Section 4003(b) provisions.

This client alert addresses certain complex issues facing public company compensation committees as companies are adapting to the economic impact of COVID‑19. We also point out the restrictions placed on executive compensation for companies that receive loans or guarantees under the new Coronavirus Aid, Relief and Economic Security Act (CARES Act).

Compensation Considerations

Delay Compensation Decisions

Most companies have recently completed or are in the process of their regularly scheduled annual compensation review to establish compensation programs for 2020, including adjusting salary levels, setting performance targets for both short‑term cash bonus plans and possibly multi‑year performance‑based equity grants and issuing annual “refresh” equity grants. In light of the current economic uncertainties, to the extent not yet completed, companies should strongly consider delaying these decisions until later in the year to allow time to prioritize essential operations and employee health and safety concerns, and to allow time to assess the operational and financial impact of COVID‑19 on the company and the general economy. Setting performance metrics now may result in misalignment with evolving economic realities and require an adjustment at a later date. Further, correcting or making multiple adjustments has a strong possibility of being criticized by investors of all sizes and by proxy advisory firms following the end of the COVID‑19 crisis and during the next proxy season.

While setting targets late in the fiscal year that appear to be easily achieved has its own pitfalls and can call into question whether the compensation was in fact performance‑based, we think that this may well be the lesser concern. In any event, compensation committees should be regularly assessing the changing landscape to determine when to make these decisions, and companies should be ready to explain any delays to their workforce.

Where performance targets have already been set, for the reasons noted above, companies should be judicious in resetting them until they have improved visibility into the changed market and business environment surrounding the company.

Go‑Forward Metrics

Many public company compensation programs are structured to link executive compensation with corporate performance as a matter of corporate governance and to address the expectations of investors and proxy advisory firms. As a result, the compensation programs, and in particular performance‑based equity awards, can be somewhat rigidly tied to specific company financial or stock price achievement, and may measure performance over multiple years. These metrics and structures are likely to prove incompatible with the current economic environment. The following alternatives should be considered:

  • Compensation committees should consider specifically incorporating flexibility in performance metrics to permit the compensation committee to exercise discretion to adjust the metrics and payouts in response to the impact of COVID‑19. This flexibility should be broad enough to allow the compensation committee to adjust the metrics to create a meaningful, challenging performance program, but tailored enough so that the program is not considered discretionary rather than performance‑based. Many plans under which annual compensation awards are issued generally provide discretion to compensation committees. However, under the current circumstances, compensation committees should consider making this flexibility specific to the award and consider establishing performance‑based compensation programs that provide broad discretion for the compensation committee to evaluate performance and determine the appropriate resulting payment.
  • From a slightly different perspective, though highly discretionary programs are generally disfavored by both institutional investors and proxy advisory firms, they may be appropriate in the current environment, and in particular if the amount of compensation that is ultimately paid pursuant to awards takes into account both the company’s treatment of its workforce and the impact of COVID‑19 on the company’s stock price at the end of the crisis. In this regard, companies that have historically used specific or formulaic metrics may consider changing their philosophy and move to a fully discretionary structure. In doing so companies should be aware that they may receive significant criticism from investors and proxy advisors, but this does not necessarily mean that this structure should not be considered.
  • Compensation committees should consider incorporating non‑financial metrics into this year’s program as well as metrics that are measured relative to peers or the market, such as relative total shareholder return, or TSR.
  • Compensation committees should consider shorter performance periods to incentivize real‑time performance.

In any event, as part of the foregoing process, companies and their advisors should review all of their incentive plans to determine whether the terms allow the compensation committee the ability to exercise discretion. If discretion is not permitted by a company’s plans, the company may need to consider amending its incentive plans to permit the use of discretion.

Adjusting Existing Performance Metrics

It is likely that outstanding performance‑based awards have been significantly undercut by COVID‑19’s far‑reaching impacts. Compensation committees that have already approved 2020 performance targets or have outstanding awards that are midway through multi‑year performance periods should begin to consider whether to adjust these targets to appropriately incentivize and compensate employees and executives in a meaningful way. However, it is imperative that compensation committees avoid rushing to adjust these open performance metrics and instead wait to allow time to thoughtfully evaluate the changing market and business conditions. This may avoid making multiple adjustments.

As noted above, companies and their advisors should review all of their incentive plans to determine whether the terms allow the compensation committee broad, limited or no discretion to modify performance metrics, and whether it is necessary to amend the incentive plans to permit the use of discretion. In all cases, compensation committees will need to carefully assess the impact of any adjustment within the scope of their fiduciary duty and responsibility for the compensation programs of the company.

Companies will be required to describe in their Compensation Discussion and Analysis any mid‑year modifications of performance targets, and should plan to explain in detail why the changes were necessary, how the revised metrics were determined, the rigor of the metrics and the goals and behavior that they incentivize. Any material mid‑year modifications may also trigger an Item 5.02 disclosure on Form 8‑K if the company has not previously disclosed modifications or the ability to make modifications in a prior public filing, or if such modification was not permitted by the terms of the plan or award. Whether a Form 8‑K should be filed is a case‑by‑case determination by the company and its legal counsel. The company should also consult with legal counsel as to whether deductibility of any prior award that is still grandfathered under Section 162(m) of the Internal Revenue Code (Code) would be impacted and whether that impact is important to the company in the current crisis.

Finally, it is important for companies and compensation committees to take account of the impact on employees of modifying or adjusting awards, both economically and from a morale perspective, as well as how investors and proxy advisors will react to any adjustments including when the next say‑on‑pay vote and election of board members occur, plus potential accounting considerations.

Delaying or Modifying Previously Earned Payouts

Companies and compensation committees should also consider delaying the payment of performance‑based compensation for the prior year that has not yet been paid, or modifying earned cash payments into equity awards, possibly on a company‑wide basis in an effort to conserve cash (and whether the award agreements permit such delay or modification, or whether obtaining employee or executive consent is required or prudent). In any event, when a delay or modification is being considered companies should consider the legal risks of doing so on an involuntary basis, especially if the plan does not explicitly allow for unilateral company action. Finally, companies should determine whether any delay of payment of earned awards would result in a violation of Code Section 409A.

Equity Usage

Declining stock prices may force companies to consider whether their equity granting methodology will result in the use of a larger number of shares in order to deliver the intended value, which could deplete their equity plan share pool at a much quicker rate than forecasted. Such an impact could result in the company either reducing the size of equity awards or seeking shareholder approval of a share pool increase earlier than intended. Companies and legal counsel should also ensure that the size of equity grants do not result in exceeding the equity plan’s existing per person 162(m) limitations that often still exist notwithstanding the changes made in 2018 with respect to Section 162(m).

This is still another reason for delaying compensation decisions until the impact of the COVID‑19 crisis is more fully understood.


With the significant stock price decreases, stock options may be underwater. As discussed above, company equity plan share reserves may be stretched as they face issuing new awards for a much higher number of shares to achieve intended grant date values. Accordingly, companies may look to reprice their outstanding stock options or exchange them for restricted stock units.

Companies considering doing so need to work within the listing rules of the New York Stock Exchange and the Nasdaq Stock Market that require shareholder approval for a repricing or exchange unless the applicable equity plan expressly provides that shareholder approval is not required. Even if a company’s equity plan permits repricing without shareholder approval, consideration should be given to seeking shareholder approval. Proxy advisory firms such as Institutional Shareholder Services and Glass Lewis generally oppose repricing without shareholder approval. Plus, proxy advisory firms typically only recommend for the approval of a repricing if it follows certain guidelines, such as converting on less than a one‑to‑one basis and excluding the company’s board of directors and executive officers from participation. In the current situation, companies can expect opposition by both institutional investors and proxy advisors to be pointed and specific with regard to any proposed repricing. In any event, a company should not initiate a repricing program before the bottom of the price drop in order to achieve the intended benefit.

As with our recommendation to not rush into 2020 compensation decisions or performance metric modifications, we suggest holding off on any quick decision to reprice outstanding stock options to allow the market to continue to react to the pandemic.

Expiring Equity Awards

Expiring awards are special cases and will require particular attention. Companies should take careful note of any upcoming expiration dates of outstanding equity awards, particularly stock options. Often these awards are held by longtime employees and have served to significantly align the interests of employees with stockholders—but such awards may have lost substantial value in recent weeks (almost certainly through no fault of the employees). Where companies have key employees that hold expiring awards, the company should consult with counsel and compensation advisors regarding ways to address the significant morale impacts of such lost wealth where the employees may view such loss as an unjust consequence for loyalty to the company.

CEO and Senior Executive Cash Compensation Reductions

Both compensation committees and CEOs, as well as other senior executives, should consider a voluntary reduction of executive base salaries to help the company conserve cash, make available cash for the general workforce and business needs or convey that the top ranks are committed to individually sacrificing for the good of the employees and the company, particularly where the company may have to make hard choices that will impact rank‑and‑file employees. Some companies are unilaterally reducing executive cash compensation.

Before making any decisions to unilaterally reduce or requesting executives to voluntarily reduce compensation, the company should consider whether any provisions of executive contracts would prohibit reduction or result in a “good reason” termination and whether specific consent by the executives to waive “good reason” would be required or would be prudent to obtain. Generally, these reductions or waivers will not require an Item 5.02 disclosure on Form 8‑K, however, to the extent a company deems this information as material to shareholders or as required by Regulation FD, companies may disclose the reductions or waivers on Item 7.01 of Form 8‑K. (The company may also see advantages of publicly disclosing such base salary reductions.)

Companies should discuss with their legal counsel the impacts of such reductions, including among other things, whether the compensation committee will control if and when the compensation levels will be reinstated, whether the reduction would be disregarded for any existing severance rights and whether there would be concern that any reduction may increase the executive’s potential Code Section 280G tax liability in the event of a sale of the company.

Limitation on Compensation if Receiving CARES Act Emergency Relief and Otherwise

Any company that is considering the economic relief provided under the recently approved CARES Act should understand that the economic relief requires specific compensation restrictions.

Section 4003(b) of the CARES Act provides certain relief for both individuals and businesses, including funding for $500 billion in loans and loan guarantees for companies in certain industries or who do not otherwise have access to credit.

Section 4003(b) of the CARES Act sets two limits on employee and officer compensation for eligible businesses that may receive part of the CARES Act loan package under Section 4003(b) of the CARES Act (to be distinguished from loans under the Paycheck Protection Program administered under Section 1102 of the CARES Act.) The limits last from the date a loan or loan guarantee is made until one year after the loan is no longer outstanding.

For any employee or officer who received total compensation of over $425,000 in 2019, loan‑recipient companies are prohibited from doing the following:

  • Increasing such employee or officer’s total compensation in any 12‑month period above the total compensation received by such employee or officer in 2019
  • Paying severance pay or other termination benefits that exceed twice the employee or officer’s total 2019 compensation

Plus, there is an additional cap for employees and officers whose total compensation exceeded $3 million in 2019. Loan‑recipient companies may pay these employees in any 12‑month period no more than $3 million plus 50% of all compensation over $3 million the employee or officer received in 2019. Total compensation includes salary, bonuses, stock awards, and other financial benefits paid by the business to the employee or officer.

Notwithstanding the foregoing compensation considerations, in the context of the current COVID‑19 crisis, compensation committees should strongly consider the benefits of reducing executive salary or total compensation, especially if the company is considering employee layoffs or furloughs.

We recommend that companies seek legal advice prior to making any of the compensation decisions discussed above. If you have any questions, please reach out to Fenwick partners Elizabeth Gartland, Scott Spector, Shawn Lampron, Matthew Cantor, Gerald Audant, David Bell, Nancy Chen or Marshall Mort for additional guidance.