Executive Compensation
Allowable or Unallowable: Unallowable, Allowable
Source: Federal Acquisition Regulation (FAR)
Federal Regulation set limits on how much companies can get reimbursed for the salaries they compensate their management. Companies can pay more, but cannot charge the government for the amounts paid above the limit. For many years, the caps only applied to the top 5 executives, but the rule changed in December 2011, and now the cap applies to all employees, not just the top 5 executives.
Definitions
Federal Acquisition Regulation (FAR)
Limitation on allowability of compensation for certain contractor personnel[4]
- (1) Senior executive compensation limit.
Applicability
(A) To all executive agencies, other than DoD, NASA and the Coast Guard, for contracts awarded before, on, or after December 31, 2011;
(B) To DoD, NASA, and the Coast Guard for contracts awarded before December 31, 2011;
- (ii) Costs incurred after January 1, 1998. For costs incurred after January 1, 1998 for the compensation of a senior executive in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP), under 41 U.S.C 1127 are unallowable (10 U.S.C. 2324(e)(1)(P) and 41 U.S.C 4304(a)(16)). This limitation is the sole statutory limitation on allowable senior executive compensation costs incurred after January 1, 1998, under new or previously existing contracts. This limitation applies whether or not the affected contracts were previously subject to a statutory limitation on such costs. (Note that pursuant to section 804 of Pub. L. 105-261, the definition of “senior executive” in (p)(3) has been changed for compensation costs incurred after January 1, 1999.)
- (2) All employee compensation limit.
- (i) Applicability. This paragraph (p)(2) applies to DOD, NASA, and the Coast Guard for contracts awarded on or after December 31, 2011;
- (ii) Costs incurred after January 1, 2012. For costs incurred after January 1, 2012 for the compensation of any contractor employee in excess of the benchmark compensation amount, determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP) under 41 U.S.C 1127 are unallowable (10 U.S.C. 2324(e)(1)(P)).
Salary Limits
The allowability of the compensation costs for the senior executives of Government contractors is capped by statute (10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16) at a benchmark executive compensation amount. The benchmark amount does not limit the amount of compensation that an executive may otherwise receive. However, the compensation costs in excess of the benchmark amount are unallowable costs for Government contract purposes. Be aware, that the executive compensation limit does not automatically determine amounts below the limit are allowable. Other considerations that make an executives compensation allowable are reasonableness, allocability, and the compensation paid by other similar companies (the benchmark)[5].
The Administrator, Office of Federal Procurement Policy, (OFPP), determines the benchmark executive compensation amount as required by Section 39 of the OFPP Act, as amended (41 U.S.C. 1127). The benchmark amount applicable for a fiscal year is the median amount of the compensation provided for all senior executives of all benchmark corporations per commercially available surveys for the most recent year for which data is available at the time the OFPP Administrator determines the amount. The data used is the median (50th percentile) amount of compensation (total amount of wages, salary, bonuses and deferred compensation) accrued over a recent 12-month period for the top five highest paid employees in management positions at each home office and each segment of publicly traded U.S. companies with annual sales over $50 million. Once a benchmark compensation amount is established for a fiscal year, it is applicable for that fiscal year for a contractor and subsequent fiscal years, unless and until revised by OFPP[6].
The Executive Compensation Cap is implemented at FAR 31.205-6(p).
The limits have been increasing, and are based on formula established in 1997. Previous limits are:
| Year | Compensation Limit | Comment |
|---|---|---|
| 1998 | $340,650 | |
| 2004 | $432,851 | |
| 2005 | $473,318 | |
| 2006 | $546,689 | |
| 2007 | $597,912 | |
| 2008 | $612,196 | |
| 2009 | $684,181 | |
| 2010 | $693,951 | |
| 2011 | $763,029 | Allowability cap is applicable to the top five executives in each home office or segment of the company. (Proposed regulations issued on June 26, 2013, would implement the 12/31/11 statutory change applying the cap to all employees retroactively for Department of Defense (DoD), NASA, and Coast Guard contracts. |
| 2012 | $952,308 | Section 803 of the FY12 National Defense Authorization Act (“NDAA”) expanded the OFPP cap (above) to apply to all contractor employees for costs charge on Department of Defense (“DoD”), NASA, and Coast Guard contracts. FAR 31.205-6(p) was revised effective June 26, 2013 to reflect this statutory change. As a result, the OFPP FY12 cap of $952,308 applies to costs incurred after January 1, 2012 by the top five executives in each home office or segment of the company, for all federal government contracts and to all employees for work on DoD, NASA, and Coast Guard contracts.
Multiple sets of rates may be needed to recover all allowable costs. 1. Contractors with significant flexibly-price contracts with agencies other than DoD/NASA/ Coast Guard may want to prepare one set of rates for those contracts, applying the OFPP Act caps only to the top five executives. 2. Contractors with significant DoD/NASA/Coast Guard contracts will need to prepare incurred cost submissions that apply the OFPP caps to all employees for such contracts. |
| 2013 | $980,796 | |
| 2014 | $1,144,888/$487,000 | The Bipartisan Budget Act of 2013 (“BBA”) repeals the compensation cap formula used by OFPP and sets a new initial allowable cost cap on contracts and subcontracts awarded on or after 180 days after enactment (June 24, 2014). This cap will be adjusted annually based on the Bureau of Labor Statistics’ Employment Cost Index.
Contractors will need at least one set of rates applying the $487,000 cap for contracts awarded on or after implementation of the BBA. OFPP caps applied to contracts awarded prior to the effective date of the FAR changes required by the BBA would need another set of incurred rates capturing the compensation limit prior to June 24, 2014. |
| 2015 | $487,000 | |
| 2016 | $500,000 | |
| 2017 | $512,000 | |
| 2018 | $525,000 | |
| 2019 | $540,000 | |
| 2020 | $555,000 | |
| 2021 | ||
| 2022 | $589,000 |
|
Compensation Still Needs to Meet Reasonableness Test
Executive compensation subject to the specific FAR and DFARS limitations is also subject to the reasonableness provisions of the FAR. Compensation that does not exceed the specific limitations may still be unreasonable when compared to other positions with comparable rank, function, and responsibility in other firms of similar size. The smaller the firm, the more likely this will be the case. Therefore, auditors should consider tests of reasonableness even when executive compensation is below the ceiling[7].
DCMA Guidance on Blended Rates
File:DCMA - Guidance on Use of Blended Rates 16-022 2016 0129.pdf
2014 Changes and Updates
The Bipartisan Budget Act of 2013 (BBA) repeals the compensation cap formula used by OFPP and sets a new initial allowable cost cap of $487,000 for costs claimed on contracts and subcontracts awarded on or after enactment (June 24, 2014). This cap will be adjusted annually based on the Bureau of Labor Statistics Employment Cost Index.
Beginning on and after June 24, 2014, contracts need to limit the amounts bid on or claimed on contracts to $487,000.
Resources and Links
Th Office of Management and Budget website is a very useful website.