Change sought to government payments for contractor executive salaries

The Obama administration has proposed a change to the way the government will contribute to the salaries of contractor companies’ senior executives.

Currently, the amount that agencies can reimburse contractors for their senior executives is set by a formula. The administration proposes "to abolish the formula and instead tie the cap to the salary of senior-most federal officials — specifically, Executive Schedule Level I, currently approximately $200,000,” according to the White House’s economic proposal of Sept. 19, “Living Within Our Means and Investing In The Future.” The government doesn't limit the amount contractors can pay their executives, only the amount that the government contributes.

The Office of Federal Procurement Policy is legally required to determine the amount of compensation to be reimbursed based on available surveys on executive pay at publicly traded U.S. companies with more than $50 million in annual sales. It’s called the Executive Compensation Benchmark.

In 2010, the OFPP allowed agencies to pay contractors up to $693.951 toward compensation for their top five executives. The Obama administration now is concerned that, based on surveys, that figure could rise to $750,000 in 2011.

“It’s that payment that strikes us as excessive,” Dan Gordon, administrator of the OFPP, said Sept. 20.

He testified before the Senate Homeland Security and Governmental Affairs Committee’s Oversight of Government Management, the Federal Workforce, and the District of Columbia Subcommittee.

Gordon said no one anticipated that the salary cap would increase as quickly as it has when the formula was designed. But at a time when federal employees’ salaries are frozen, “it seems unreasonable to continue to dramatically increase the amount that we compensate.”

So now, the administration wants to reset the Executive Compensation Benchmark to equal out pay between federal and contractor executives’ compensation.

“Just as the government must be prudent in paying federal employees, it must also not overpay contractors,” the White House wrote.

One industry group objected to the new proposal, saying the administration wants to tie together two unrelated salary caps.

“It inappropriately ties company executive compensation to irrelevant government executive compensation levels,” said Stan Soloway, president and CEO of the Professional Services Council.

“If companies and government agencies are to attract the best and brightest executives, which would certainly be in the best interests of both sectors, then they need to be able to be competitive in the marketplace,” Soloway said. To do that, the executives’ compensation should be tied to the commercial sector.

The administration's proposal could not be changed through regulatory reforms, but would require Congress to pass legislation.

The PSC wouldn’t speculate on the likelihood of the proposal making it through Congress.

In a similar matter, House and Senate versions of the fiscal 2012 National Defense Authorization Act (H.R. 1540 and S. 1253) have provisions that would extend the compensation cap. The House wants the cap to cover “any individual performing under the covered contract." The Senate has proposed extending it to all company executives and managers.

The House and Senate Armed Services Committees raised concerns with audits at the Defense Department showing some defense contractors paying employees more than the benchmarked amount because those persons were not executives. The committees believe their provisions would take care of that.

The House passed its defense legislation in May, but the Senate has not passed its version.

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Reader comments

Mon, Apr 1, 2013

Actually, Small businesses, minority owned businesses, veteran owned, etc all have to compete for contracts. There are several rules out there to ensure the competition and our small disadvantaged business doesn't receive a contract that is 'set aside' as such and is competing against very large prime or OEM Contractors for work. We are often priced out of the market. Further I know literally hundreds of small, disadvantaged, woman owned, service disabled & veteran owned business men/women and not one of us has received a cost plus nor pay as you go contract. Everyone of us are all always the lowest bidder amongst everyone else when we receive government contracts. And the government nor the president dictates to us how much executives in our companies make, but then again not one of us is in any where near the level(s) of sales nor compensation discussed above. And I work with government employees every single day and I have always heard how they sit around and make a lot of money to do not much. Or how 'they are just lucky that they have this or that gov't job'. I am here to tell you that is categorically false. If half the people in my employ (or in the rest of industry) worked half as hard as these men and women I would have retired after a year or two in business. They typically (at least on the government DCMA side) do the work of five people; and if they were employed in the private sector would make at least 5-10 times what they make. I think people generally hear about these very large or very well connected business people getting sweetheart deals/contracts and assume everyone in the industry does. It simply isn't true the vast majority if us are just toiling away barely making it day to day just like everyone else. I hope this sheds some light on the subject for others. Just my two cents.

Mon, Oct 17, 2011

The government is it's own worst enemy when it comes to paying money for contract work. When you limit the contractors to whom can bid by ethnic background and size of company, you are defeating the purpose of bidding, because this reduces the number of companys that can bid on a job. The bid process is what helps you keep the cost down for any contract that is bid. Also the government needs to eliminate the guarntee of a percentage of profit for contracts also. The contractor needs to adjust it's profit percentage for each job bid.

Fri, Oct 14, 2011

Another wise move by the government! The government in its infinite wisdom decided to have cost+ contracts to keep costs down. With these types of contracts, contractors are limited to a specific amount of profit but can roll their costs (salaries, bonuses etc.) into the contract. Costs soared! Going to firm fixed price (FFP) contracts solves this problem and puts the risk onto the contractor, instead of ridiculous solutions like the one proposed.

Mon, Oct 3, 2011 Dave K

Let's see... if I don't have the skills necessary to perform a job, and I contract out for it, isn't the real hypocrisy when I try to tell the contractor how he should organize his businees?

Thu, Sep 22, 2011

Some of you are lost. I agree with the President. No one is telling contractors what to pay their people. However, since most of you want the government to save you money on contracts, it makes no sense for the government to keep paying executives excessive amounts on government contracts. If the comtractor wants to keep paying a higher amount they should pay it out of their profits. As to the person talking about bonuses, if you want to cut government personnel and now people are doing the work of two people and putting in long hours, why not pay them a bonus when their pay is frozen? I don't hear you calling for pay cuts and an end to bonuses when companies are passing on higher costs to you for goods and services. Be consistent and not a hypocrite!

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