The National Defense Authorization Act (NDAA) of 2012 set into motion a limit on the executive pay issue relative to government contractors. The NDAA resulted in an interim rule 78 FR 38535. Initially FAR Case 2012-017 extended applicability of the limit from not only the top 5 executives but further to all employees. FAR Case 2012-025 was then implemented that made this new caps retroactive to contracts issued prior to December 31, 2011 (It would affect billings on 1/1/2012 or after). These interim rules were recently finalized and will result in a change in the regulations. This rule change is applicable to all contracts with the Department of Defense, NASA and the GSA. The new rule will control not only the executive compensation limits on contractors but will control all pay levels (there may be some exceptions for certain scientist and engineers in highly specialized fields) of all employees. While I say "control compensation" it doesn't mean that the company cannot compensate individuals at levels above the limit but instead that any amount over the cap will be considered an "unallowable" expense and therefore not billable to the government.
I thought it might be a good idea for us to look at this in a little detail. Previously, the limit for executive compensation was established by means of a benchmark. The benchmark was established by a chain of regulations outlined in FAR 31.205-6(p), 10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16). This benchmark reached a level of $952,308 just prior to the signing of the new law limiting the compensation to $487,000 (Bipartisan Budget Act of 2013). So the cap is now just about half of what it previously was. Some of the issue is not so much what the cap is but more the effective date of the law. If the limit is retroactive to 2011, there could be some instances where companies have over billed the government (billed unallowable expenses). This will cause some problems for companies caught in this situation as they will have to figure out the amount of over billing and determine how to compensate the government for this. Companies that don't address the situation could face audit problems or contract closeout problems.
I think that most small businesses will not be affected by the cap as their salaries are most probably below the new cap limit. Large corporations are much more likely to have executive compensation packages that exceed the $487,000 cap and thus will have to address the "Unallowable" portion of the compensation. In addition, large corporations are likely to have more than 5 personnel that have compensation packages that exceed this limit. In the past the government was only concerned with the top 5 executives but now is concerned with all employees. Again, this will add to compliance worries. Small companies could find themselves in a situation where they have a specialist that is highly compensated. Exemptions can be granted by the head of an executive agency in fields such as mathematics, medical & cyber security or other areas requiring a unique area of expertise. These exceptions will be approved and narrowly targeted.
All of this does not mean that a company cannot pay an employee more than this amount, it just means that they will not be compensated by the government for any amount over the cap. I like the fact the government is trying to control excessive individual compensation on government contracts (especially since we only pay the President $400,000). On the other side of the coin, I fear that this will only make compliance when doing government contracting more difficult to monitor and achieve.
Update 6-3-16
DCAA Executive Compensation Limits
Due to a wave of interest in this blog, and Executive Compensation Limits and the DCAA in general, ReliAscent would like to add that we have several DCAA and FAR Compliance Experts on staff that are happy to help your small business navigate this issue (should you it be a problem given the current compensation cap). If you would like to discuss this issue with us further, please contact us directly, or click the button below to email our Marketing Manager, who can get you in touch with an expert:
