Compensation Benchmarking

Determination of Reasonableness of Compensation Costs

a. A compensation element is considered unreasonable if the contractor's compensation for that element exceeds the survey data weighted average (or median) rates by 10 percent. This judgment factor considers that a determination of unreasonable compensation results from material compensation system deficiencies or unjustified pay policies. A large difference between the average and median can be the result of a few atypical cases skewing the average, especially in small sample sizes. When sample sizes are small and there are material differences between average and median (e.g., executive salaries), the median should be used.

b. Each allowable element of an employee’s compensation for jobs within a job class or grade is benchmarked to survey data. The benchmarking of jobs to determine reasonableness for the salary element of compensation is explained in 6-413.3f. The determination of the reasonableness for the fringe benefit element is made at the total payroll level for all jobs within a compensation system, as explained in 6-413.5. An example of determining unreasonable compensation at the grade level for the salary and fringe benefit elements of compensation is shown in Figure 6-4-1.

c. A contractor's pay structure may include jobs that cannot be compared to market survey data because of a low number of incumbents or the jobs are unique to the organization. Nonbenchmarked jobs within the same grade or job class as the benchmarked jobs are to be considered unreasonable to the same degree as the benchmarked jobs because they are of relative value based on the contractor's job evaluation system (see 5-808.7).

d. Individual elements of compensation (such as wages and salaries, bonuses, fringe benefits, and deferred compensation) may each be subject to the FAR tests and be considered unreasonable if they exceed the market survey weighted average data by 10 percent.

Unreasonable costs are computed by applying the percent difference between the amount that the compensation element exceeds the survey data to the element amount. However, the aggregate of allowable elements of compensation should be considered to determine reasonableness. See 6-413.7 for guidance