Executive compensation debate returns

hand holding money

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.

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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.


About the Author

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

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Government Cyber Insider tracks the technologies, policies, threats and emerging solutions that shape the cybersecurity landscape.


Reader comments

Tue, Oct 23, 2012

Why not add in the health and pension benefits the American taxpayer will be saddled with when it comes to the union worker and what they get for the rest of their life while the rest of us try to save through contributions into a 401k account. Unlike the government union "worker" (and I say that almost tongue in cheek given the folks I have been in contact with in industry), we do not have free fringe benefits (surely not health & pensions paid for by others for the rest of our life) and most small businesses in this industry are S Corporations which means the shareholder is paying the taxes for the corporation through their individual return - taxes which pay for that same government worker to retain their job unlike 47% of this country that pays no tax! What does a union "employee" know about running anything either so to compare the two, is apples to oranges - they are putting nothing on the line, not taking any risks, putting in the long hours needed to be successful and to retain the jobs of their staff while - believe it or not - building something. Unlike the belief of our Illustrious Leader and his followers, the government does NOT build it, we the people do and should be recognized accordingly.

Mon, Oct 22, 2012

OK folks say this for what it is. Federal employees pay has been attacked by the American taxpayer as well as the Executive and Legislative branches, therefore a counter-attack is in order. Only problem is, we're civil SERVANTS. Industry officials are not. They chose a different path. We serve at the pleasure of the American public. Throwing up the Nobel prize winners as evidence that there are those in govt willing to work for less is very weak. Heck, president Obama received the Nobel Peace prize just after he took office before he did anything. The Nobel clearly is awarded on something other than merit (not intended as a partisan attack). Of course, the company can pay what they want, but a company will judge how serious the govt is about a program by how much it is willing to help pay for the management talent to deliver. Separately, personally I believe the lower ranks of the federal pay scale is too generous, the upper, not generous enough. The president and congress need to stop attacking the fed employee as if their compensation will break a budget. Social Security, Medicare, Obamacare, the military and the interest on the national debt already do that. Reduce those programs as well as the taxes that pay for them.

Mon, Oct 22, 2012

I wonder what the upper union bosses get for compensation? I know that when I was at Lockheed, at least one had enough largess to take family and friends for a multi-week trip to Europe (ended a strike just so he did not miss his trip).

Mon, Oct 22, 2012

Methinks the contractors protest too much. Nobody is telling them they can't earn as much as they want, just that they can't expect the government o pay for all of it. They'll just need to reduce the profit to the company shareholders - and justify the largess to them at the annual board meeting. Executive compensation has gotten way out of whack with what the average employee is paid, which is one reason the middle class is getting squeezed.

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