Wednesday, October 3, 2012

Compensation - Part 4 - Form of Payment

Compensation is more than cash. Although for most employees, cash is the only form of compensation they receive, there are sometimes other forms of compensation that must be considered when determining reasonableness. Corporate securities such as stocks, bonds and other financial instruments are considered a form of payment. No longer are such things reserved for top executives. Companies that offer corporate securities as incentive compensation to their employees represent a small but growing segment within the Government contracting community.

Another form of compensation delineated in this FAR cost principle is "other assets, products, or services". We suppose this is simply a "catch-all" phrase to include everything else. We recall a number of years ago where a defense contractor, owned by a U.S. automobile manufacturer, offered deep discounts on their automobiles to company employees. These discounts were considered reportable compensation to the employees and therefore the costs would have fallen under this "everything else" provision. We also recall a company offering employee discounts to some of its consumer electronics. The discounts in this case were considered "de minimis" and not considered compensation. "Materiality" is a factor in determining whether something is compensation. In the former example, the discount was material and therefore compensation. In the latter case, the discount was not significant and therefore not compensation. Materiality is something that is often in the eyes of the beholder and auditors will no doubt take different positions on similar situations.

This section also adds additional restrictions when compensation is paid with securities. These restrictions include:

  • valuation placed on the securities is the fair market value on the first date the number of shares awarded is known determined upon the most objective basis available.
  • accruals for the cost of securities before issuing the securities to the employee are subject to adjustment according to the possibilities that the employees will not receive the securities and that their interest in the accruals will be forfeited.

Next: Section (e): Income Tax Differential Pay

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