Small businesses largely immune to reduced contractor pay cap

Small contractors would be relatively unaffected by a proposal to reduce the amount contracting companies are allowed to charge the government to cover employee compensation, according to a new Government Accountability Office report.

Reducing the contractor compensation cap to the level of the salary drawn by the President ($400,000) or the Vice President ($230,700), as suggested by some lawmakers and the White House in the past, would dramatically increase the number of employees who earn compensation above the allowable limits, GAO said.

But most of those employees would come from large companies, auditors said, because few of the small companies it surveyed paid their employees more than the amount earned by the President and Vice President.

“While industry associations and many of the large-tier and mid-tier contractors expressed concerns should the cap be reduced, most small-tier companies we reviewed generally stated they would either be only minimally affected or not affected should the cap be reduced because they generally did not offer compensation above the Vice President’s salary,” GAO concluded.

The report also identified concrete savings from reducing the compensation limit.

If the cap were to be changed to the same salary drawn by the President, there would be more than $180 million in contractor compensation costs per year that companies would no longer be able to charge to the government, according to the report, which surveyed a random sample of 27 companies. If the cap were set at the level of the Vice President’s salary, the government would save $440 million, GAO said.

Still, the report is unlikely to settle the debate about contractor compensation any time soon.

Upon the report’s release, a bipartisan group of senators, including Barbara Boxer (D-Calif.) and Chuck Grassley (R-Iowa), reintroduced legislation that would cap contractor compensation at the Vice President’s salary level. On the other hand, the Professional Services Council, an industry group, criticized the GAO report’s findings as “lacking in both context and depth.”

Few employees currently exceed caps

Under current law, government-reimbursed contractor compensation is tied to a formula designed to mirror the compensation levels of top private-sector CEOs and has grown by 63 percent since being implemented in the late 1990s, GAO reported.

The cap is now $763,029 and is set to rise to $950,000 later this year.

Currently, few contractor employees earn compensation at levels greater than the cap. Across the 27 companies GAO surveyed, fewer than 200 total employees earned compensation that exceeded the cap in the years 2010 through 2012.

But that number would have increased to nearly 600 if the cap had been set at the President’s salary level during those years and more than 3,400 if the cap had been set at the Vice President’s salary, GAO said.

Most employees with compensation that would exceed the revised cap levels are employed by large-tier contractors (companies earning more than $2 billion earned through contract obligations, GAO said).

According to GAO’s survey, there are more than three times as many employees at large contractors with compensation costs that exceeded the President and Vice President’s salaries compared to mid-tier contractors (companies earning between $15 million and $2 billion in government contracts).

Across the small-tier contractors (companies earning less than $15 million from government contracts), no employees earn more in compensation than the current caps, no more than two employees earned compensation above the level of the President’s salary and no more than five employees earned more than the Vice President.

Another result of reducing the cap, however, would mean more nonexecutives and nonmanagers would be subject to the compensation limits, GAO said. Currently, all employees who earn more in compensation than is allowable by the government cap are executives, GAO said. But if the cap were reduced to the Vice President’s salary, about 10 percent of the affected employees would be rank-and-file workers.

When it was first instituted and for much of its existence, the compensation cap only applied to a company’s top five executives. However, in the 2012 Defense authorization bill, Congress expanded the cap to include all company employees.

Group questions GAO’s methods

The Office of Management and Budget has long supported capping contractor compensation. Late last month, the Office of Federal Procurement Policy sent a bill to Capitol Hill capping compensation at the President’s salary level.

OMB officials, according to the report, said GAO’s findings underscore the need to pass legislation lowering the cap. OMB also said the savings from doing so would be “substantially higher” than the $180 million identified in the report, since the sample of contractors GAO examined accounted for just 7 percent of the Defense Department’s contract spending in 2012.

However, while some DoD officials told GAO they support a reduced cap, others said they needed more data on potential impacts, specifically noting the small sample of contractors GAO studied.

Contractors and industry groups have long bristled at the notion of lowering the compensation cap. Doing so could affect their ability to recruit and retain top talent, they argue and may eventually drive companies out of the federal sector altogether.

In a statement, Stan Soloway, president of the Professional Services Council, criticized the GAO report’s methodology.

“The sample size of 27 companies is simply too limited and the analysis does not take into account how the proposed caps match up against the demands of the broader marketplace for talent, which is where companies, like the government, must be able to compete,” he said. “In the end, that is the most important and relevant question. Unfortunately it remains unanswered.”

Three of the largest defense contractors — Northrop Grumman, Lockheed Martin and Boeing — did not provide GAO with information on the number of employees whose total compensation exceeds the salary earned by the President and Vice President.


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