Contracting

Would capping contractor salary reimbursements make a difference?

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The impact of a proposed cap on contractor executive salary reimbursement would depend on the size of the contractor, according to a new Government Accountability Office study.

Executives at large companies, said the agency, would feel the biggest pinch under the cap proposal, which is backed by the White House's Office of Management and Budget. GAO found that few smaller companies paid their executives at levels comparable to the president and vice president.

The study, released June 19, stems from government efforts to stanch rising executive compensation under federal contracts. Currently, contractors that are paid based on their incurred costs can demand reimbursement for executive salaries. About one-third of current contract spending is included in that, according to Joe Jordan, administrator of the Office of Federal Procurement Policy at OMB.

Companies have been limited in the amount they can be reimbursed since the 1990s, but according to the GAO, the cap has dramatically increased in real terms -- by 63 percent -- since then. The cap, set at $693,951 in 2010, rose to $763,029 for 2011 and 2012. It is set to reach $950,000 this year if no action is taken by lawmakers.

In a May 31 blog post concerning president Obama's latest budget, Jordan proposed tying contractors' executive compensation levels to the president's salary of $400,000.

Tying executive salary to the president's pay grade, GAO found, would have saved the government $180 million in compensation costs from 2010 to 2012. Tying it to the vice-president's salary of $230,700, which Congress also asked GAO to consider, would have saved $440 million, GAO found.

GAO queried 27 companies about executive pay in the study. Across that sample of contractors, it found that fewer than 200 employees in any one year had compensation costs over the existing cap. However, the number would have increased to more than 500 if the cap had been set at the president's salary, and to more than 3,000 if the cap had been set at the vice president's salary, GAO found.

It also noted that contractors held the proposed caps would be tricky to apply, since work that qualifies as executive-level is not easy to pin down. One contractor, it said, listed 126 employees with compensation costs over the vice-presidential salary who had the word "scientist" or "engineer" in their job title. But the company chose not to classify any of those individuals as scientists or engineers, because they considered them to be executives.

OMB told GAO that the study underscored its point that compensation-reimbursement policies need reform. OMB added that the growth in the cap has outpaced the rate of inflation, the rate of growth of private sector salaries generally, and the rate of growth of federal salaries. It also said the proposed cap would not limit the amount companies could pay their executives, only the amount that taxpayers would reimburse the company.

Government services providers, however, warned that the study was based on a "minuscule" sample of the government contracting sector, and lacked context and depth.

"The sample size of 27 companies is simply too limited and the analysis does not take into account how the proposed caps match up against the demands of the broader marketplace for talent, which is where companies, like the government, must be able to compete," said Public Services Council President Stan Soloway in a June 19 statement. "In the end, that is the most important and relevant question. Unfortunately it remains unanswered."

The study, Soloway said, does not consider the impact of the proposed caps down the road. And the report mixes two different terms; compensation and salary, he noted, are not the same thing.

If the president's salary were subjected to the same definition used in law to determine allowable contractor compensation, which includes benefits, bonuses, and other taxable elements, "it would almost certainly be well into the millions of dollars," Soloway said. In addition, taxpayers provide the president's food, transportation, housing and security.

As such, his salary is "not even a baseline worth measuring against," Soloway argued.

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Reader comments

Fri, Jun 21, 2013 Marbran Columbia, MD

I support this move. Contractor executives are not supporting one Federal client as a FTE; they are actively involved entirely across a company's internal operations. To have the government cover their salaries as an expense within a contract is just robbing the taxpayer and enriching the company even more. If a company wants to pay its executive more than the highest paid Federal government employee, that money should come out of the company's profits.

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