U.S. Caps Exec Compensation Reimbursement at $200K

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U.S. President Barack Obama’s new deficit plan includes a nearly half­million-dollar reduction of the contractor executive reimbursement cap, but experts say that the cut is more political spectacle than big financial move.

The plan would cap the reimbursement of federal contractors for executives through cost-based contracts at $200,000, substantially less than last year’s cap of $693,951. The current cap is calculated as an average of compensation awarded to top executives at publicly traded companies with sales exceeding $50 million annually.

“This is not going to change the government’s deficit or debt balance sheet,” Steve Schooner, a former procurement law expert at the White House Office of Management and Budget, said. “But it is always excellent political theater to say that we’re going to take a line out of the hides of contractors.” Reimbursements up to the cap figure are included as allowable expenses for each of a contractor’s most senior executives on cost­based contracts that represent $160 billion in spending each year, according to White House figures.

For larger contractors, the half­million-dollar reduction pales in comparison with the $20 million-plus salaries some top executives draw. With companies already bearing all of the cost above the current cap, cuts would likely have little effect on compensation, Schooner said.

“I do not expect that any major defense contractors are planning on reducing executive compensation to $200,000 as a result of this, nor does the federal government,” he said.

The stated purpose of the cap, reduction of the federal deficit, is deceptive because executive compensation is a small fraction of total contracting, Rob Burton, former deputy administrator of the Office of Federal Procurement Policy, said. “That’s very misleading because it’s not going to have any major impact on the budget or the deficit,” he said. “It’s just an infinitesimal impact.”

Still, the cap could hurt smaller contractors who use reimbursement as a larger part of their compensation plans. “For some of the smaller companies, they have very little flexibility,” Alan Chvotkin, executive vice president of the Professional Services Council, said. “The allowable cost is the salary cap. Those are the companies that I worry about.”

Chvotkin said these smaller companies might have greater difficulty competing for talent because of diminished compensation.

Burton said the larger message is that contractors will face increasing pressure.

“Companies need to be concerned, as this is a symbol of more things to come,” he said. “It’s a continuing theme that contractors are fair game in this budget reduction exercise. I think you’ll see other proposals that will have a much more dramatic impact than this one.”

Chvotkin said that members of his organization are used to the pressures. He said, “It seems like every day or so, we have another target on the contractor community.”