Executive compensation debate returns

Labor unions and watchdog groups have once again pressed Senate and House armed services committees to decrease the amount that the government will pay defense contractors for executive compensation. They want a 70-percent decrease.

The 10 groups, in a letter to leaders of the committees, pointed to sequestration, other looming budget cuts and the government’s overall money situation as reasons why Congress should cut the compensation amount by $532,329. They consider the $763,029 cap as “grossly unfair.”

The Executive Compensation Benchmark, as it is formally called, is the limit at which the government will contribute to compensating a contractor’s senior executives for a fiscal year. The compensation includes the total amount of wages, salaries, bonuses, restricted stock, and deferred and performance incentives. Companies can pay their executives as much as they choose, but the government currently will only cover it up to $763,029. The groups are pushing lawmakers to lower the benchmark to $230,700, a figure set by matching the vice president’s annual salary.

For civilian agencies, the cap applies to compensation for a contractors’ senior executives only. For Defense Department contractors, however, due to a provision in the National Defense Authorization Act, it applies to all employees.

Resources:
Read the letter
White House memo on the Executive Compensation Benchmark  
Article: Biden to become the benchmark for executive pay?
Article: Agencies to pay more toward contractor executives' salaries

The letter, dated Oct. 18, was sent by five labor unions, including the American Federation of Government Employees and the National Treasury Employees Union. In addition, four watchdog groups signed on, including OMB Watch, and the Project of Government Oversight. The Economic Policy Institute, a think tank, signed the letter too.

To these groups’ frustration, the Office of Federal Procurement Policy increased the benchmark in April from $693,951 to $763,029. In 2004, the government would only compensate an employee as much as $432,851. The cap has climbed 75 percent in eight years.

So far, the Senate Armed Services Committee has agreed to its version of the fiscal 2013 National Defense Authorization Act (S. 3254) that includes such a provision. The Senate has yet to pass the bill though. The House passed its version of the authorization act but did not include that provision. However, in the fiscal 2012 NDAA, Congress expanded the benchmark to include all defense contractor employees, not just a company’s top five executives.

In the letter, the groups wrote that potential employees are out there, willing to work for a lower salary.

“Contrary to what some contractors claim, compensation levels over $230,000 are not required to find and retain a talented workforce,” they wrote. Their examples are Nobel Prize winners who work for the government for less than $200,000. In addition, they say the government could save $5 billion a year if the regulators would cap compensation at $200,000. The groups based their figures on cost estimates obtained from the Defense Department.

They also cited an Army official who said DOD would save more money than that. According to a footnote in the letter, Jay Aronowitz, deputy secretary of the Army for force management, manpower and resources, said DOD could reduce by $6 billion the labor costs reported in the Contractor Manpower Reporting Application for 2011 contract services. Officials would just need to apply a $400,000 employee rate cap to fiscal 2011 Army inventory of contract services. Aronowitz had provided the information in response to an inquiry from Sen. Claire McCaskill (D-Mo.), chairwoman of the Armed Services Committee’s Readiness and Management Support Subcommittee.

But one industry expert said the comparison between what a firm charges for a labor-hour line item in a contract and how a company creates an executive’s pay package is not a fair contrast. The packages include options, bonuses for business targets they achieve, deferred compensation plans, and benefits packages. They all go into the bottom line.

“It’s worse than apples to oranges,” Larry Allen, president of Allen Federal Business Partners, said about the comparison. “It’s more like apples to Oreos.”

Moreover, executives are trudging into an ever-increasing amount of rules and regulations when they enter the federal contracting marketplace. Allen said it is no easy task to keep up with all the extra hoops to jump through and still have a successful business.

“They should be compensated accordingly. Whether or not that merits a Nobel Prize is a matter of speculation,” he said.

Allen suggested another path to saving money. The unions and watchdog groups should advocate for repealing the Davis-Bacon and Related Acts and the McNamara-O’Hara Service Contract Act. Both of the laws serve to maintain higher-than-market wage levels for federal projects.

“If repealed, the government would save millions in labor costs and enhance competition,” he said.