Government Contracts Monitor

Executive Compensation Benchmark Applies To Most Contractor Employees

July 26, 2013

In a series of regulatory actions, the limit on allowable costs for compensation of most contractor employees has been limited to the Executive Compensation Benchmark, a level of allowable compensation traditionally applied only to senior executives.

Previously, the Office of Federal Procurement Policy set a $763,029 cap for allowable costs incurred after January 1, 2011 related to senior employee compensation. This Executive Compensation Benchmark was limited in scope, by law, to a contractor’s five most highly compensated employees in management positions at each home office and each segment of the contractor.

Section 803 National Defense Authorization Act for Fiscal Year 2012 changed the law to apply the Executive Compensation Benchmark to “any contractor employee” with the possible exception “for scientists and engineers upon a determination that such exceptions are needed to ensure that the Department of Defense has continued access to needed skills and capabilities.” In other words, the allowable compensation limits were extended to virtually all employees of federal contractors.

An interim rule and a proposed rule were published in the Federal Register to apply this change in law to the FAR. The interim rule (78 Fed. Reg. 38535) immediately applies the Executive Compensation Benchmark prospectively to all federal contracts awarded on or after December 31, 2011. The proposed rule (78 Fed. Reg. 38539) seeks to retroactively apply the Executive Compensation Benchmark to all contractor employees on DoD, NASA, and GSA contracts awarded prior to December 31, 2011, the date the new law became effective. The Government is accepting comments on both the interim and proposed regulations through August 26, 2013.

Michael J. Schrier is the attorney responsible for the content of this article.