Pentagon pay cap executive pay reimbursement at $694,000

September 19, 2011

Clarification: An earlier version of this article was dated September 25. This version has been updated to reflect that correct date.

Lockheed Martin and other defense contractors won’t be able to bill the government for more than $693,951 a year in total salary and compensation for any executives under a proposal headed for congressional approval.

The Senate is mulling an expansion to all executives from current rules limiting the cap to contractors’ top five executives. The House has approved a cap on all employees of defense vendors. While the full Senate has yet to vote on its committee-approved version, and the two chambers must still reconcile their differences, the expanded executive pay limit has a good chance to survive.

Total compensation includes wages, salaries, bonuses and deferred compensation.

“There is no logic in having a cap on executives one through five, and then executives six through whatever can make more than the statutory cap,” Mike Steen, a government contracting consultant with the Huntsville, Ala., law firm Beason & Nalley, said in a recent interview.

The House-passed version of the 2012 defense authorization bill would apply the cap to all employees of contractors who do business with the Pentagon. The Senate Armed Services Committee’s version would apply the cap only to managers and executives.

Limit on claims

The change, which would only affect Defense Department contracts, would have little effect on salaries at major vendors, the head of a firm that specializes in accounting for defense contractors said. It only means the vendors can’t submit claims for compensation above that amount.

“You can pay yourself what you want,” Veronica Eyenga, president and chief executive of VBP Outsourcing, a Glen Burnie accounting firm, said in a recent phone interview.

For the top five federal contractors by prime contract value in 2010 — Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon — the average reported annual compensation was $8 million per executive, according to data compiled by Bloomberg.

Steen, a former executive at the Defense Contract Audit Agency, which reviews military deals for unallowable executive compensation costs, said large companies with billions of dollars in government work can prorate the costs of executive pay across numerous contracts.

If Congress expands the cap to all employees, companies could be blocked from billing the government for highly specialized, expensive employees, such as a scientist or engineer working on a project for the military, Steen said. “That person’s salary would also be limited,” he said.

The American Federation of Government Employees, which represents 600,000 federal workers, is lobbying Congress to lower the cap to $200,000 for all contractor employees.

“Any amount above $200,000 is, quite frankly, a premium that the taxpayers cannot afford to pay a contractor workforce that is already lavishly rewarded,” AFGE Public Policy Director Jacqueline Simon said in a recent e-mail.

Old pay baseline

The White House Office of Management and Budget sets the executive compensation limit based on the median amount of compensation during the previous year for the top five highest-paid executives at each home office and each segment of publicly traded companies with annual sales over $50 million. OMB set the current limit of $693,951 on April 15, 2010.

Three lawmakers — Sen. Barbara Boxer (D-Calif.); Sen. Charles Grassley (R-Iowa); and Rep. Paul Tonko (D-N.Y.) — sent a letter to OMB Director Jacob J. Lew on Sept. 15 asking him to update the total using more recent data.

”The American people deserve to know exactly how much government contractor executives will charge the taxpayer for their salaries this year,” the lawmakers wrote.

OMB spokeswoman Moira Mack did not provide a comment.

Rob Doolittle, a spokesman for Falls Church-based General Dynamics, the fourth-largest government vendor, declined to comment on the proposed legislation.

“Since those provisions are not yet law, it would not be appropriate for us to speculate about what the potential impact might be,” he said in a recent e-mail.

Officials at the other four largest government contractors did not respond to requests for comment.

Non-defense agencies still would only review the compensation costs for the top five executives if the change for defense contracts passes Congress.

Senate Majority Leader Harry Reid (D-Nev.), has not yet scheduled full Senate consideration of the 2012 defense authorization bill. Lawmakers from the two chambers will meet after Senate passage to work out differences between the two versions of the bill before final passage.

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