OMB and DoD Looking for Alternative Sources for Benchmarking Compensation

The Office of Federal Procurement Policy (OFPP) and the Department of Defense issued a "Notice of Request For Public Comment" yesterday, seeking public input into the development of a report to Congress on alternative measures of determining allowable compensation costs.

As we reported on these pages, the President, last December, signed into law the Bipartisan Budget Act of 2013 which capped compensation for all Government contractor employees at $487 thousand per year and became effective for contracts entered into after June 24, 2014. By law, this cap must be adjusted annually for inflation, based on the change in the Employment Cost Index for all workers (as published by the Bureau of Labor Statistics).

A separate provision of that legislation (Section 702(e)) directed that OMB and DoD report to Congress on alternative benchmarks and industry standards for compensation, including whether any such benchmarks or allowable compensation.

The $487 thousand cap was purely a subjective figure. Congress and the Executive Branch were proposing varying amounts based on the President's salary, the Vice President's salary and other arbitrary amounts. The old benchmark, which had grown to $950 thousand per year was based on the median (59th percentile) amount of 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.

Evidently, neither the OMB nor DoD came up with any good alternative benchmarks to present to Congress because they are now asking the public for ideas. Specifically, OMB and DoD are seeking public input on alternative benchmarks that would provide a more appropriate measure of allowable compensation including appropriate inflators (i.e., alternatives in lieu of the Employment Cost Index for all workers. Any public input should be accompanied by explanations as to why such might be more suitable than the benchmark and inflators set forth in statute.

The new compensation cap is going to hit a lot of contractors, some pretty hard. Perhaps there will be some relief as a result of this request for public comment.

It should be noted that the $487 thousand figure is an absolute cap on compensation. It does not mean however that contractors can pay any employee up to that amount and call it reasonable. The reasonableness criteria in the FAR cost principle for compensation still applies.

Comments will be accepted until October 16th, 2014.