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Deltek: Contractors should stay aware of compensation cap proposals

By Susan Eggleston,

Government contractors’ profit margins are already tightening as federal agencies trim their budgets. But they could get tighter if any of a number of different contracting compensation proposals making their way around Washington come to pass.

Federal laws and regulations already set limits related to the amount contractors can compensate their leadership. Companies are permitted to pay above the allowable limits, but costs above the caps can’t be passed on to government customers.

To win contracts, companies have to hire the best talent. That means they may pay them more than they can charge customers — eating into their profit margins.

For many years, the caps applied only to the top five executives working for a company. But legislation passed in December extended the cap to cover the compensation of all employees.

The limits have been increasing for years — from $432,851 in 2004 to $763,029 in 2011 — based on a formula established in 1997. But a movement has begun to lower those limits

In the spring, Sens. Barbara Boxer (D-Calif.) and Charles E. Grassley (R-Iowa) introduced the Commonsense Contractor Compensation Act of 2012, which would permanently set the cap equal to the president’s salary, or about $400,000. It remains in committee with no apparent action yet.

The bill followed an Office of Management and Budget report last September that recommended an even lower threshold of $200,000, tied to the salary of members of the president’s cabinet.

Neither proposal has become law, but with the government tightening its belt and public scrutiny of contractors increasing, the proposals could be signs of a trend — and not one that contractors would find easy to accommodate.

The largest companies with the most diverse customer bases also have the largest number of executives who make enough to be affected by lower limits. These businesses would be forced to cut salaries — risking a talent drain — or increase prices to their nongovernment clients or face reduced profits.

Smaller businesses, especially those without commercial clients, would not have the option of spreading costs. They may simply be faced with limits on what they can offer and struggle to attract top talent.

Industry isn’t powerless. Regulatory proposals come with comment periods, providing an opportunity to offer feedback. With profit margins already thin, the industry is likely to push back.

Susan Eggleston is vice president for systems engineers and solution architects at Herndon-based Deltek, which conducts research on the government contracting market and can be found at www.deltek.com.

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