GAO Review of Employee Compensation Paid by Defense Contractors

Since the mid 1990s, federal law has placed limitations or caps on the amount of employee compensation that contractors can charge to federal contracts. This cap, based on a complex formula, has outstripped inflation by 63 percent. For compensation paid in 2012, the cap is $763,029.

The 2013 National Defense Authorization Act (NDAA) directed GAO (Government Accountability Office) to provide information on the effect of reducing the amount of employee compensation that contractors can charge to federal contracts. Specifically, GAO was tasked to provide information on the effect of reducing the cap to the salary of the U.S. President and Vice President and to obtain the views of government and contractor representatives on potential effects of a reduction in the cap.

GAO collected data from 30 randomly selected contractors from 3 strata; 10 from large-tier, 10 from mid-tier, and 10 from small-tier populations. Data was received from 27 of the 30 contractors sampled. The three contractors that refused to provide data incidentally, were the three largest contractors in GAO's sample. GAO used the data as voluntarily submitted and made no attempt to validate or substantiate the information provided.

GAO reported that reducing the cap to the President's salary ($400 thousand) or the Vice President's salary ($230,700) would significantly increase the number of employees exceeding the cap. That's hardly surprising.  The interesting information here is the impact to taxpayers. For just the 27 companies reporting data, contractors reported over $180 million per year in compensation costs that would have exceeded a cap set at the President's salary. That number rises to $440 million per year if the cap were set at the Vice President's salary. GAO made no attempt to project these results but one can see that the real impact is significantly more than the reported amounts.

Government representatives generally supported reducing the cap as a means of reducing the costs of DoD contracts (again, hardly surprising). Contractor representatives however identified negative effects that could result from reducing the cap. These include

• reduced profits (amounts paid over the cap would come from company profits
• challenges in attracting capital from the financial markets
• negative impact on company's ability to attract and retain top talent
• over the long term, lead companies to reassess their business and staffing models
• shift work or personnel from government business to their commercial sector

This report is certain to gain a lot of attention as Congress gets to work on the 2014 NDAA. As reported here in this blog, the 2014 NDAA that came out of the House Armed Services Committee includes a $400 thousand cap on the top five executives.

You can read the entire GAO report here.