Bonuses and Incentive Compensation - Corporate Securities

Yesterday we discussed certain criteria that contractors must meet in order for the cost of bonuses and incentive compensation to be allowable under Government contracts. There are some additional requirements for bonuses and incentive compensation that is paid out or based on company stock (e.g., stock options and stock appreciation rights). Costs for these are limited to the fair market value of the stock on the measurement date, the first date that the number of shares awarded is known. If the stock option or stock appreciation price is equal to or greater than the market price on the measurement date, then no costs are allowed for contracting purposes.

 

The theory behind this restriction is that compensation based on changes in the prices of corporate securities is not compensation based on work actually performed. To make this clear, beginning in 1996, FAR specifically added the following expressly unallowable costs;

•  Any compensation which is calculated, or valued, based on changes in the price of corporate securities;
• Any compensation represented by dividend payments or which is calculated based on dividend payments; and
• Payments to an employee in lieu of the employee receiving or exercising a right, option, or benefit which would have been unallowable anyway.