Agencies to pay more toward contractor exec salaries

The cap that limits the government's payments to compensate contractors' five most senior executives has risen after all, the Obama administration announced April 23.

The cap, known as the Executive Compensation Benchmark, rose by nearly $70,000 from $693,951 to $763,029 annually

The law requires the administrator of the Office of Federal Procurement Policy to set a benchmark yearly at which the government will reimburse a company for its top five executives. The Obama administration had sought to reduce it by tying it to federal salaries.

Compensation for the fiscal year includes the total amount of wages, salaries, bonuses, restricted stock, and deferred and performance incentives. OFPP determines the amount based on surveys of private-sector executives at companies with more than $50 million in annual revenue.

Companies can pay their executives as much as they choose, but the government will only cover it up to the cap.

 The compensation cap controversy has attracted a lot of attention within the Obama administration and in Congress over the past nine months. Administration officials warned against raising the cap while federal employees were under a pay freeze.

The Office of Management and Budget “will soon be forced to publish a notice in the Federal Register that raises the cap even higher—tens of thousands of dollars above what it was in 2010," Lesley Field, acting OFPP administrator, wrote in a OMBlog post Jan. 31, foreshadowing today’s announcement.

In the post, she urged members of Congress to fix the “outdated” benchmarking law.

The administration proposed abolishing the formula and instead tie the cap to the salary of senior-most federal officials.

Obama wants to set the cap based specifically on Executive Schedule Level I salaries, which currently are approximately $200,000. Obama offered the suggestion in September in his plan for economic growth and deficit reduction.

In an April 23 Federal Register notice, OFPP wrote that the growth in the benchmark has outpaced the rate of inflation from 1995 onward and growth in federal and private-sector salaries in general.

The new benchmark is “forcing our taxpayers to reimburse contractors for levels of executive compensation that cannot be justified for federal contract work,” OFPP officials wrote in the notice.

Senators are attempting to get the benchmark changed.

While the Senate’s Fiscal 2012 National Defense Authorization Act included a cap on contractor compensation for salaries, that provision failed to make it into the final version of the law. The law did however, expand the cap to include all contractor employees, not just the top five executives.

As a result, Sens. Barbara Boxer (D-Calif.) and Chuck Grassley (R-Iowa) introduced the Commonsense Contractor Compensation Act (S. 2198) that extends a $400,000 cap which would to cover all contractor employees and equals the president's $400,000 annual salary. But the bill has not been passed.

As for actual salaries, Grant Thornton surveyed more than 100 companies in 2011 for its annual report on government contractors and reported average salaries for executives.

The survey found that  a company with between $51 million and $100 million in annual revenue, the highest paid executive earns on average $380,000. At companies with more than $100 million in revenue, the highest paid executive earns on average $600,000.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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Reader comments

Tue, Apr 24, 2012 it's in the contracts not today, thanks

To the commenter above: Contractors recoup these costs through the magic of cost accounting, specifically through indirect and direct costs they charge to Government contracts. The top executives of a contractor are typically found in the General And Administrative Expense pool, because their activities benefit the company as a whole. All this law means is that $763,029 is the maximum amount that can go in the G&A pool for executive compensation when the G&A rate is calculated. It doesn't even mean it's all going to be paid for under a Government contract, if dollars in the chosen base are charged to a commercial contract. (Although many contractors know how the game is played and they are going to make darned sure that their military projects are in a separate division and they will recoup every penny.) So when those direct dollars are charged to a contract, the G&A rate (where the CEO pay is recouped) will follow. All perfectly allowable under Government Accounting.When you work in contracting, the higher grades and "sexy jobs" are are typically in the project management offices and do pre-award work. The lowly Administrative Contracting Officers are the ones who are negotiating final indirect rate proposals. These are the indirect rates that are applied to final cost-reimbursement contracts on closeout. Just 1/10 of a percent can be a difference in hundreds of thousands of dollars. These jobs require years of experience to do properly, and are hard to fill and the people are overworked and overwhelmed. The good ones realize they can make more money on the other side. And yes, in a competitive contract, it isn't that much of an issue, but whomever said "who cares who much contractors pay their CEOs" doesn't understand the sheer magnitude of sole-source contracts in DOD. Industrial base? Pl-ease. As a taxpayer, you ought to be glad this provision is in place, because the national debt would be worse if it were not.

Tue, Apr 24, 2012 Richard

For the scenario seeker... If GSA does it, it is called "corruption" and heads roll. If private industry does it, it is called "business" and is OK. But for us Feds, it's a bitter pill that we can continue to pay contractors more and more while we get beat up as "over paid".

Tue, Apr 24, 2012

My CEO needs more compensation. He does SO MUCH to make these computer systems work the way the Feds thought they heard the vendor say they were supposed to work.

Tue, Apr 24, 2012 Frustrated

Just another example of NOT over paying government employees. Freeze government employees pay and give the fat cats a $70,000 raise.

Mon, Apr 23, 2012

Can someone provided a scenario or specific examples where this compensation even applies? I'm confused that we are outraged at GSA's recent issues and yet the government pays the salaries of top executives?!?!

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