Determination of Benchmark Compensation Amount for Certain Executives and Employees, 72930-72931 [2013-28982]

Agencies

• Management and Budget Office
• Office of Federal Procurement Policy

[Federal Register Volume 78, Number 233 (Wednesday, December 4, 2013)]
[Notices]
[Pages 72930-72931]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28982]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy


Determination of Benchmark Compensation Amount for Certain 
Executives and Employees

AGENCY: Office of Federal Procurement Policy, Office of Management and 
Budget.

ACTION: Notice.

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SUMMARY: The Office of Management and Budget is publishing the attached 
memorandum to the Heads of Executive Departments and Agencies 
announcing that $952,308 is the ``benchmark compensation amount'' for 
certain executives and employees in terms of costs allowable under 
Federal Government contracts during contractors' fiscal year 2012. This 
determination is required under Section 39 of the Office of Federal 
Procurement Policy Act, as amended (41 U.S.C. 1127). The benchmark 
compensation amount applies to both defense and civilian agencies.

FOR FURTHER INFORMATION CONTACT: Raymond Wong, Office of Federal 
Procurement Policy, at 202-395-6805.

Joseph G. Jordan,
Administrator, Office of Federal Procurement Policy.

Memorandum for the Heads of Executive Departments and Agencies

FROM: Joseph G. Jordan, Administrator, Office of Federal Procurement 
Policy
SUBJECT: Determination of Benchmark Compensation Amount for Certain 
Executives and Employees, Pursuant to Section 39 of the Office of 
Federal Procurement Policy Act, as amended (41 U.S.C. Sec.  1127)

    This memorandum sets forth the benchmark compensation amount for 
employees of Federal Government contractors as required by Section 39 
of the Office of Federal Procurement Policy (OFPP) Act, as amended (41 
U.S.C. Sec.  1127) for the purposes of section 4304(a)(16) of title 41 
and section 2324(e)(1)(P) of title 10. The statutory benchmark amount 
(the ``cap'') limits the allowability of compensation costs under 
Federal Government contracts as implemented at Federal Acquisition 
Regulation (FAR) 31.205-6(p). In less technical terms, the statute 
places a cap on the total annual compensation amount the Federal 
Government will reimburse a contractor for the compensation the 
contractor provides to each of its employees for work done pursuant to 
certain Federal Government contracts. This cap applies to the 
compensation of certain contractor senior executives on contracts with 
civilian agencies (i.e., agencies other than the Department of Defense 
(DOD), the National Aeronautics and Space Administration (NASA), and 
the United States Coast Guard), and the compensation of all contractor 
employees on contracts with defense agencies (i.e., DOD, NASA and Coast 
Guard), when the contractor is performing contracts that are of either 
a cost-reimbursable nature or other cost-based nature. It should be 
noted that, while the statute places a cap on the amount that the 
Federal Government will reimburse the contractor, the statute does not 
limit the amount of compensation that the contractor actually pays to 
its employees. Contractors can, and do, provide compensation to their 
employees that exceed the amount that is reimbursed by the Federal 
Government.
    Section 39 of the OFPP Act sets out a formula for determining the 
cap amount. Specifically, the cap amount is set at the median (50th 
percentile) amount of compensation provided, over the most recent year 
for which data is available, to the five most highly compensated 
employees in management positions at each home office and each segment 
of all publicly-owned U.S. companies with annual sales over $50 
million. The determination is based on analysis of data made available 
by the Securities and Exchange Commission. Compensation means the total 
amount of wages, salaries, bonuses, restricted stock, deferred and 
performance incentive compensation, and other compensation for the 
year, whether paid, earned, or otherwise accruing, as recorded in the 
employer's cost accounting records for the year.
    When the cap was raised to $693,951 for Fiscal Year (FY) 2010, the 
President called on Congress to repeal the current statutory formula 
and replace it with a lower, more sensible limit that is on par with 
what the Government pays its own executives and employees. Over the 
last several years, the Administration has strongly reiterated the need 
for reforms to the current statutory framework and Congress has 
considered several proposals to reform the compensation cap. To date, 
however, Congress has not revised the cap amount or the formula for 
adjusting the cap. Instead, Congress made only a modest change that 
expanded application of the statutory cap on defense contracts from the 
contractor's senior executives to all of its employees (section 803 of 
the National Defense Authorization Act for FY 2013, Pub. L. 112-81, 
December 31, 2011). This expansion of the applicability of the cap to 
all contractor employees did not cover contracts with the civilian 
agencies, so the cap for those contracts remains applicable only to 
certain contractor senior executives, which is defined as the five most 
highly compensated employees in management positions at each home 
office and each segment of the contractor.
    After consultation with the Director of the Defense Contract Audit 
Agency, OFPP has determined, pursuant to the requirements of Section 
39, that the FY 2012 cap amount for the compensation of a contractor 
employee covered by this provision is $952,308. (By comparison, the cap 
for FY 2011 was $763,029, which means that the statutorily-mandated 
formula for calculating the cap has generated a one-year increase of 
nearly $190,000 in the amount that taxpayers are required to reimburse 
contractors for their compensation practices.) This amount applies to 
limit the costs of compensation for contractor employees that are 
reimbursed by the Government to the contractor for costs incurred on 
all contracts, after January 1, 2012 and in subsequent contractor FYs, 
unless and until revised by OFPP. This applies to covered contracts for 
both defense and civilian procurement agencies, as specified in Section 
39. Additionally, as explained above, with regard to civilian agencies, 
the cap continues to cover compensation to the same limited number of 
contractor executives as did the Section 39 caps for FY 2011 and prior 
years. With regard to covered contracts awarded by DOD, NASA, and the 
Coast Guard, the cap covers compensation for all contractor employees. 
Consequently, the cap may apply to different groups of contractor 
employees, employed by the same contractor, if that contractor has 
contracts with both defense and civilian agencies.
    Because Congress has not changed or replaced the statutory formula 
for setting the cap, the Administration is compelled by statute to 
raise the cap for another year in accordance with that

[[Page 72931]]

statutory formula. In other words, under current law, the 
Administration has no flexibility to depart from the statutory 
requirement that the cap be adjusted annually based on the application 
of the statutorily-mandated formula. Under the statutory formula, the 
cap for the reimbursement ceiling must be adjusted from one year to the 
next, and these annual adjustments must be based on annual survey data 
of compensation amounts for certain senior executives of publicly-owned 
U.S. companies with annual sales over $50 million. As has been amply 
demonstrated throughout the 15 years in which this statutory formula 
has governed, the statutory reliance on the survey data bears no 
relationship to (1) the type of work that contractor employees are 
actually performing under applicable Federal contracts and (2) the 
general trends in the U.S. economy with respect to increases in prices 
and wages. The statutorily-driven outcome is that, each year, taxpayers 
must continue to go even further down the path of paying for increases 
in the reimbursement cap that far outpace the growth of inflation and 
the wages of most of America's working families. Prior to the enactment 
of the statutory formula in 1998, the reimbursement cap was an amount 
that was specified by statute; for Fiscal Year 1997, Congress set the 
cap at $250,000. When the current statutory formula went into effect, 
it increased the cap to $340,650 (for costs incurred after January 1, 
1998). Since then, the statutory formula has generated annual increases 
that have now resulted in the cap reaching $952,308 (for costs incurred 
after January 1, 2012). In addition to this statutorily-dictated amount 
being a one-year increase of nearly $190,000 (from the prior cap of 
$763,029 for FY 2011) and a two-year increase of nearly $260,000 (from 
the cap of $693,951 for FY 2010), this amount also represents an 
increase in the cap of 55% over the last four years (from the cap of 
$612,196 for FY 2008).\*\
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    \*\ Congress set the reimbursement cap at $250,000 for FY 1997 
in P.L. 104-201, Sec.  809, and P.L. 104-208, Sec.  8071. The 
current statutory formula, with its annually-required adjustments, 
was put into place by P.L. 105-85, Sec.  808, as amended by P.L. 
105-261, Sec.  804. The statutory formula increased the cap to 
$340,650 for costs incurred after January 1, 1998, and the 
subsequent annual increases have raised the cap to $342,986 (1999); 
$353,010 (2000); $374,228 (2001); $387,783 (2002); $405,273 (2003); 
$432,851 (2004); $473,318 (2005); $546,689 (2006); $597,912 (2007); 
$612,196 (2008); $684,181 (2009); $693,951 (2010); $763,029 (2011); 
and now $952,308 (2012).
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    Earlier this year, the Administration again urged Congress to 
reform the compensation cap. The Administration's proposal would 
replace the current formula with a benchmark compensation cap that is 
tied to the President's salary--which is currently $400,000--and apply 
it across-the-board to all contractor employees on all defense and 
civilian cost-based contracts. Employers would continue to have the 
discretion to compensate their employees at any level they deem 
appropriate--the cap would continue to only limit how much the 
Government will reimburse the contractors for the services of those 
employees. Tying the cap to the President's salary provides a 
reasonable level of compensation for high value Federal contractor 
employees while ensuring taxpayers are not saddled with paying 
excessive compensation costs. Importantly, the proposal provides for an 
exemption to the cap if, and only if, an agency determines such 
additional payment is necessary to ensure it has access to the 
specialized skills required to support mission requirements, such as 
for certain key scientists or engineers. These important reforms can 
save taxpayers hundreds of millions of dollars over what they will have 
to pay if the cap remains unchanged.
    Questions concerning this memorandum may be addressed to Raymond 
Wong, OFPP, at 202-395-6805.

[FR Doc. 2013-28982 Filed 12-3-13; 8:45 am]
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