[Federal Register Volume 77, Number 78 (Monday, April 23, 2012)]
[Notices]
[Pages 24226-24227]
From the Federal Register Online via the Government Printing 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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