Coming defense vote will alter contractor executive pay

With a Senate vote expected in early October on the fiscal 2012 Defense authorization bill, changes appear likely in how contracting companies are reimbursed for what they pay their executives. But the reach of the new policy remains in dispute.

Both the House and Senate versions of the bill would expand the current cap on contractor compensation to apply to a larger group of employees working on a defense contract, not just the top five executives, as under current law. But the White House, as part of President Obama's major deficit reduction and jobs proposal, would lower the cap for reimbursements -- for all federal cost-plus contracts, not solely defense -- from its current level of nearly $700,000 to $200,000, though it would continue to apply only to the top five contractor executives.

Contractor groups and at least one employees union, meanwhile, have their own ideas.

The rationale for the change to cover all employees, as presented by the House Armed Services Committee in its report, is that "the Defense Contract Audit Agency has shown that there are lower-level executives not subject to the cap and nonexecutive employees who receive compensation in excess of the benchmark compensation amount. The committee believes that this section would reduce the risk of excessive individual compensation charged to defense contracts."

The Senate Armed Services Committee, whose version of the authorization bill is due on the Senate floor in early October, would expand the cap to all management employees or senior executives. The panel's report said the expansion "is justified to ensure that the department is not required to reimburse defense contractors for unreasonable or excessive compensation paid to company executives."

Sen. Barbara Boxer, D-Calif., who in September co-signed a letter pressing the Office of Management and Budget to hurry along its new policy on the compensation cap, told Government Executive that "particularly in these tough economic times, the American taxpayers shouldn't be on the hook for exorbitant salaries for government contractor executives."

OMB, however, continues to press Obama's plan for a cost-plus governmentwide cap of $200,000 on what is reimbursable to contractor employees. "Over the last 15 years the rate of growth in the cap has far outpaced the rate of inflation and the growth of federal salaries -- forcing our taxpayers to cover levels of compensation that cannot be justified for federal contract work," OMB spokeswoman Moira Mack said Tuesday. "The president believes it's time to end excessive reimbursements to federal contractors for executive pay and instead bring down the cap to the salary of a Cabinet official, bringing greater parity between what the government pays for contractors' executive compensation and what it pays its own executives."

That plan has not satisfied the American Federation of Government Employees, which wrote the administration in March asking that officials expand the cap on executive pay to cover all contractor employees. The White House proposal "falls short," said AFGE spokesman Tim Kauffman, "because it sets no limit on how much contractors can charge the government to subsidize salaries for any contractor employee above the rate for Cabinet heads, not just the top five."

Major defense contractors contacted by Government Executive declined comment.

But resistance to altering the reimbursement cap has long been on the agenda of industry coalitions such as the Acquisition Reform Working Group, which consists of the Professional Services Council, the Aerospace Industries Association, TechAmerica, the Coalition for Government Procurement, the National Defense Industries Association, the Associated General Contractors of America, the U.S. Chamber of Commerce and the American Council of Engineering Companies.

On Sept. 19, the working group released a critique of the pending Defense authorization bills. It reiterated long-standing contractor arguments about how executive pay is a product of market forces, competition for talent and industry benchmark surveys. It said the plan for widened application of the compensation cap, which originally was proposed by the Defense Department, has not been scored by the Congressional Budget Office to measure projected savings nor for its potential impact on contractor finances.

Still, the working group recommended that coming House-Senate conferees adopt the Senate committee's approach, but "clarify that the cap should only cover senior executives with profit and loss responsibilities. This would eliminate the arbitrary cutoff in current law covering the top five executives at each headquarters," it said, "but allow time for further analysis before considering extending the cap more broadly."

The Professional Services Council, meanwhile, on Sept. 27 released its annual compensation survey. It reported that government contractor executive pay levels on average are now 69 percent higher than those of their federal employee counterparts', a rise from 48 percent in last year's survey.