FAR 31.205-6(p) limits compensation paid to the five most highly compensated employees in management positions at each home office and each segment of government contractors. The limit is a benchmark amount determined by the Administrator, Office of Federal Procurement Policy (OFPP). For calendar year 2010, the cap is $693,951. The OFPP has not yet published the 2011 cap. You can view the yearly maximum amounts since 2004 at OFPP's website.
Since the cap applies only to the five most highly compensated individuals, there are more than a few Government contractors with employees earning more than the cap but not within the cadre of "top five". As long as the contractor can demonstrate that compensation levels are reasonable, the OFPP caps do not apply.
This may change. There are provisions in both the House and Senate versions of the fiscal year 2012 Defense Authorization Act (Sections 806 and 803 respectively) that will extend the compensation cap to all employees. Essentially the proposed legislation replaces the term "top five senior executives" with "all employees".
Our guess is that this provision will survive the legislative process and get signed into law.