[Federal Register Volume 77, Number 78 (Monday, April 23, 2012)]
[Notices]
[Pages 24226-24227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9747]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
Determination of Benchmark Compensation Amount for Certain
Executives
AGENCY: Office of Federal Procurement Policy, OMB.
ACTION: Notice.
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SUMMARY: The Office of Management and Budget is publishing the attached
memorandum to the Heads of Executive Departments and Agencies
announcing that $763,029 is the ``benchmark compensation amount'' for
certain executives in terms of costs allowable under Federal Government
contracts during contractors' fiscal year 2011. This determination is
required under Section 39 of the Office of Federal Procurement Policy
Act, as amended (41 U.S.C. 1127; formerly, 41 U.S.C. 435). The
benchmark compensation amount applies to both defense and civilian
agencies.
FOR FURTHER INFORMATION CONTACT: Raymond Wong, Office of Federal
Procurement Policy, at 202-395-6805.
Lesley A. Field,
Acting Administrator, Office of Federal Procurement Policy.
MEMORANDUM FOR THE HEADS OF EXECUTIVE DEPARTMENTS AND AGENCIES
FROM: Lesley A. Field, Acting Administrator, Office of Federal
Procurement Policy
SUBJECT: Determination of Benchmark Compensation Amount for Certain
Executives, Pursuant to Section 39 of the Office of Federal Procurement
Policy Act, as amended (41 U.S.C. 1127)
This memorandum sets forth the benchmark compensation amount for
certain executives as required by Section 39 of the Office of Federal
Procurement Policy (OFPP) Act, as amended (41 U.S.C. 1127; formerly, 41
U.S.C. 435). The statutory benchmark amount limits the allowability of
compensation costs under Federal Government contracts as implemented at
FAR 31.205-6(p). In less technical terms, the statute places a cap on
the amount of contractor-paid executive compensation that the Federal
Government will reimburse, in the case of those contractors that are
performing contracts that are of a cost-reimbursable or other cost-
based nature. It should be noted that, while the statute places a cap
on the amount that the Federal Government will reimburse the
contractor, the statute does not limit the amount of compensation that
the contractor actually pays to its executives; contractors can, and
do, provide compensation to their executives that exceed the statutory
benchmark compensation amount.
Section 39 of the OFPP Act sets out a formula for determining the
benchmark compensation amount. Specifically, the benchmark amount is
set at the median (50th percentile) amount of compensation over a
recent 12-month period for the five most highly compensated employees
in management positions at each home office and each segment of all
publicly-owned companies with annual sales over $50 million, and the
determination is based on analysis of data made available by the
Securities and Exchange Commission. Compensation for the fiscal year
means the total amount of wages, salaries, bonuses, restricted stock,
deferred and performance incentive compensation, and other compensation
for the year, whether paid, earned, or otherwise accruing, as recorded
in the employer's cost accounting records for the year.
After consultation with the Director of the Defense Contract Audit
Agency, OFPP has determined, pursuant to the requirements of Section
39, that the benchmark compensation amount for certain executives for
the contractors' fiscal year (FY) 2011 is $763,029. This amount is for
contractors' FY 2011 and subsequent contractor fiscal years, unless and
until revised by OFPP. This benchmark compensation amount applies to
contract costs incurred after January 1, 2011, under covered contracts
of both the defense and civilian procurement agencies as specified in
Section 39.
This past fall, the Administration proposed that Congress, starting
with FY 2011, replace the existing statutory formula for calculating
the cap on the amount that the Federal Government will reimburse
Federal contractors (both defense and civilian). This proposal was
contained in the President's Plan for Economic Growth and Deficit
Reduction, which is on OMB's Web site at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/jointcommitteereport.pdf.
In place of the formula that is in Section 39, the President's Plan
proposed (on page 21) that Congress put in place a reimbursement cap
that would be equal to the pay rate for the Federal Government's most
senior executives, who are the heads of the 15 Cabinet departments and
certain other high-level officials. These senior-most
[[Page 24227]]
Federal officials are paid at the rate set for positions at Level I of
the Executive Schedule (5 U.S.C. 5312). During calendar year 2011, the
pay for Level I positions was $199,700, as set forth in Schedule 5 to
Executive Order 13561 of December 22, 2010 (75 FR 81817, 81822;
December 29, 2010).
The President's proposal was in response to the fact that the
existing statutory formula (enacted in 1997) has resulted in the
reimbursement cap tripling since the mid-1990s: whereas the
reimbursement ceiling for 1995 was $250,000, the statutory formula has
resulted in substantial annual increases in the subsequent years, so
that by FY 2010 the reimbursement ceiling had reached $693,951. And, as
this notice announces, the statutory formula has resulted in a
reimbursement ceiling for FY 2011 of $763,029. This is an increase in
just one year of nearly $70,000--and of 10%--in the amount that the
taxpayers can be required to reimburse Federal contractors for the
compensation that the contractors have decided to pay their executives.
This rate of growth in the cap (both from 1995 onward, and in this most
recent year) has far outpaced the rate of inflation, the rate of growth
of private-sector salaries generally, and the rate of growth of Federal
salaries--forcing our taxpayers to reimburse contractors for levels of
executive compensation that cannot be justified for Federal contract
work.
This is the direct result of the fact that the statutory formula
sets the reimbursement ceiling, and increases it from one year to the
next, by reference to considerations that have no relationship to the
type of work that contractors are actually performing under Federal
contracts that are cost-reimbursable or are otherwise cost-based. As
noted above, the formula under Section 39 requires that the
reimbursement ceiling be set, and adjusted annually, by reference to
the amount that equals the following: the median (50th percentile)
amount of compensation, over a recent 12-month period, that all
publicly-owned companies with annual sales over $50 million have paid
to their five most highly compensated employees in management positions
at each home office and each segment. It is this formula, and not any
comparable improvement in contractor performance (and the benefits that
the taxpayers receive from these contracts), that has resulted in the
one-year increase of $70,000 (10%) from FY 2010 to FY 2011, and the
tripling from 1995 to FY 2011, in the amount that the taxpayers can be
required to reimburse Federal contractors for the compensation that the
contractors have chosen to pay to their senior executives.
By proposing to replace the existing statutory formula with a
reimbursement cap that is tied to the salary of a Cabinet official
(such as the Secretary of Defense), the President's Plan would bring
parity between the amount that the American public pays for the senior
executives of the Federal Government and for the senior executives of
those contractors who perform work for the Federal Government on a
cost-reimbursable or other cost-based arrangement. (As is the case with
the current formula under Section 39 of the OFPP Act, the proposal in
the President's Plan would not impose any limits on the amount of
compensation that a contractor pays to its executives; the proposed cap
at the level of the salaries of Cabinet officials would limit only how
much the taxpayers will reimburse the contractors for the compensation
decisions that the contractors have chosen.)
To date, Congress has not adopted the Administration's proposal to
replace the existing statutory formula for determining the
reimbursement cap. However, in Section 803 of the recently-enacted
National Defense Authorization Act for FY 2012 (H.R. 1540; P.L. 112-81,
December 31, 2011) (NDAA), Congress did extend the applicability of the
existing cap to any contractor employee performing under a ``covered
contract'' under 10 U.S.C. 2324 (which are contracts awarded by the
Department of Defense, the Coast Guard, and NASA), with the exception
that ``the Secretary of Defense may establish one or more narrowly
targeted exceptions for scientists and engineers upon a determination
that such exceptions are needed to ensure that the Department of
Defense has continued access to needed skills and capabilities.''
The effect of this new statutory provision is that, while the cap
on reimbursement based on the Section 39 formula is retained, it will
now apply to more employees--essentially all employees performing
covered contracts for the Department of Defense, Coast Guard, and NASA
(with narrowly targeted exceptions). This means that, for the first
time, there will be a statutory cap (at the Section 39 level) on
reimbursement for employee compensation for all employees performing
under covered contracts, rather than only for a limited number of
executives as has been the rule under Section 39 until now.
However, this broader application of the Section 39 cap does not
apply to FY 2011. That is because Section 803 of the NDAA provides that
its amendments ``shall apply with respect to costs of compensation
incurred after January 1, 2012.'' Accordingly, the benchmark
compensation amount in this notice, for FY 2011, applies only to the
same limited number of contractor executives as did the Section 39 caps
for FY 2010 and prior years. The broader application called for in
Section 803 of the NDAA will be implemented through regulation and
addressed in future notices.
Questions concerning this memorandum may be addressed to Raymond
Wong, OFPP, at 202-395-6805.
[FR Doc. 2012-9747 Filed 4-20-12; 8:45 am]
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