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.
AETHOS Consulting Group is a global advisory firm serving the hospitality industry. The firm enhances value for its partner organizations via access, know-how and fresh thinking. Core competencies include executive search, compensation consulting, business strategy and psychometric assessments. The firm is designed as a single partnership operating from ten locations in North America, Europe and Asia Pacific. www.aethoscg.com.
About Keith Kefgen: With more than 30 years of experience in hospitality, Keith is a career industry executive. Having graduated from the Cornell University Hotel School, he went on to work at Waldorf=Astoria Hotel before embarking upon a career in hospitality executive search. He was the CEO & Founder of HVS Executive Search before joining AETHOS Consulting Group. A frequent lecturer on industry-related issues, Keith has written more than 200 articles on the topics of executive selection, pay-for-performance, corporate governance and executive leadership. Keith can be reached at kkefgen@aethoscg.com
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