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.