Lawmakers urge cap on salary contributions for all contractor employees

Lawmakers are pressuring the so-called supercommittee to bring federal contributions to the wages of contractor employees more in line with the salaries of federal employees. Not just the executives -- all employees.

In an Oct. 12 letter to the members of the Joint Select Committee on Deficit Reduction, Sens. Barbara Boxer (D-Calif.) Chuck Grassley (R-Iowa), and Rep. Paul Tonko (D-N.Y.) said that reining in the amount of money contractors can charge government for salaries would help reduce the deficit.

Current rules impose a cap of approximately $694,000 on the amount charged for compensation (including wages, salary, bonuses and deferred compensation) of their top five employees. The three lawmakers propose lowering the cap to $200,000 and expanding it to cover all of a contractor’s employees. Their concern is that inflated salaries ultimately are passed on to government through higher bids.

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But other lawmakers also see it as a matter of fairness. In an Oct. 13 report to the supercommittee, Democrats on the House Oversight and Government Reform Committee proposed the same cap and reduction, arguing that contractors should feel the same pinch in the pocket that federal employees have.

They wrote that contractor’s executives are paid 64 percent more than the federal employees, citing a recent survey by the Human Resource Association of the National Capital Area.

“Rather than imposing additional cuts to the federal workforce, the Joint Select Committee should reform compensation for federal contractors,” the Democrats wrote.

In September, President Barack Obama made the same recommendation. One administration official called the current compensation benchmark, which is set at about $694,000, “excessive.” And based on the current benchmarking formula, the compensation cap could go as high as $750,000 in 2011.

The Office of Federal Procurement Policy determines the amount of compensation, such as salaries and bonuses, that the government will reimburse for, based on available surveys on executive pay at publicly traded U.S. companies with more than $50 million in annual sales. However, officials have not updated the Executive Compensation Benchmark for 2011, leaving it at the 2010 level.

Importantly, the government cannot tell contractors how much to pay their employees; it can only cap the amount that agencies contribute toward the salaries. The president wants to bring down the compensation cap to $200,000 to match the most senior federal employee’s pay salary.

But some lawmakers want to go further.

“The president’s proposal is a good start, but we encourage you to expand the cap so that it applies to all contractor employees,” Boxer, Grassley, and Tonko wrote in their letter to the super committee.

Congress has already looked at similar compensation expansion proposals. The 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.

Industry is objecting though. These potential cuts and caps could exacerbate problems with recruiting talented employees, particularly when pay is better outside of the federal marketplace. Agencies already face enormous challenges to get such talent with government salaries.

Extending those same limits to government contractors will simply put companies in the same predicament, said Stan Soloway, president and CEO of the Professional Services Council.

Further, the government has authority to call out a company for excessive wages.

Soloway said the executive compensation caps are just that—caps on reimbursement. They represent the maximum that can be charged to the government. But the actual amount an individual company can charge to the government is tied directly to what the government determines is fair and reasonable for a company of a similar size in a similar market.

Federal officials already have the right to reject to a contractor’s wages, and they frequently do, Soloway said.

“Arbitrarily tying salaries to a wage scale that most objective observers agree is well below that which is available throughout the remainder of the economy, is short-sighted and illogical,” he said.

The supercommittee’s bipartisan recommendation will receive an up-or-down vote in Congress before Dec. 23.