George Bulpitt – Gov-Con Solutions’ Senior Government Compliance Specialist, George Bulpitt gives input on this important question.
This posting is a combination of a long time interest of mine and a seminar question. When the issue of limiting executive compensation entered our environment in 1998, I was tasked to prepare a white paper for my management. The research took me back to World War II issues involving sovereign rights and was quite an education. Our seminar participant’s question was quite to the point, “I understand the Government is going to limit all contractor salaries to $200,000, is this true?”
My response to her question was prefaced that I was concerned about only one aspect of the discussion: cost recovery. Whatever is your political persuasion, either big government or free market or social justice to level the playing field, the answer is not here.
Government contracting is far more complicated than commercial activity and the costs are correspondingly higher. Let’s take a short retrospective to where this started. Congress inserted a paragraph into the 1998 Defense Appropriation Act applicable to both defense and non-defense contracts making unallowable executive compensation greater than “the median amount of compensation provided for all senior executives of all benchmark corporations for the most recent year”. A benchmark corporation is defined as, “a publicly owned, United States corporation that has annual sales in excess of $50,000,000 for the fiscal year.” The 1998 amount was established at $340,650. The Office of Federal Procurement Policy reviews data and changes the allowable amount on a yearly basis. This limit appears to be based solely on “political considerations” with data added to support the already arrived at decision. Congress used a formula comparing Government sector salaries with the commercial sector “that would result in the lowest dollar limitation for government contractors.” They felt this was better than “an arbitrary dollar amount”. Note also that the composition of the Senate was 45 Democrats and 55 Republicans and the House of Representatives was 207 Democrats and 226 Republicans for 1997-1999. For comparison purposes, the Senate is 51 Democrats and 47 Republicans and the House of Representatives is 193 Democrats and 242 Republicans for 2011-2013.
What happened next was really interesting. The benchmark corporations paid their executives the going market price. The benchmark grew from $340,650 to $693,951 or about 203% compared to the Consumer Price Index growth of about 36% (1998 – 2011). The formulaic approach failed so now Congress is attempting the arbitrary amount of $200,000 method. There is support in the Senate based on a voice vote of 93-7. The House’s version of the appropriations bill is silent on the Senate proposed limit but they did expand the existing cap to all contractor employees. Remarkably, the House did not reduce the existing cap of $693,951.
In my opinion, nothing much will happen now. This being an election year with the economy and deficit as major issues, what will give one side or the other any incentive to act? Both sides will be content to wait until after the elections and see how the balance of power in the Congress is established. This cap was enacted with Republicans controlling both houses of Congress. The voice vote in the Senate of 93-7 gives the argument for a different, as yet undefined, cap a strong possibility of enactment.
As House bill 1540 changed the previously established rule, it did so by increasing the contractors allowable cost documentation burden. The compensation limit originally applied to “senior executives of contractors” has now changed to “any contractor employee”. My reading says that contractors now must demonstrate that lowest paid employee does not exceed the compensation limit. Optional Schedule T per the Defense Contract Audit Agency (ICE) Incurred Cost Electronically provides a usable format for accumulating the needed information.
The House bill also states that this will be effective January 1, 2012. Incurred Cost Claim planning for 2012 will need to include this step whatever the final limit.