About Those Excessive Federal Contractor Salaries…

Illustration by POGO.

Earlier this year, Senator Bernie Sanders (I -VT) expressed concern about the excessive compensation federal contractors are paying their executives. In a letter to Secretary of Defense James Mattis, Sanders pointed out that the CEOs of Lockheed Martin and Raytheon were each paid over $20 million in compensation last year. Sanders called it “simply unacceptable” that both companies pay their leaders such “obscene” salaries while relying on the taxpayers for most of their revenue.

“Lockheed Martin is a government agency…virtually fully funded by the U.S. government,” Sanders remarked several days earlier at a Senate Budget Committee hearing on the Department of Defense’s business operations.

The five largest federal contractors—Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman—all derive a substantial amount of income from Uncle Sam, which awarded the five companies a total of $115 billion in contracts in fiscal year 2017. According to data compiled by The New York Times, the CEOs of these companies were paid a combined total of $89.8 million in compensation last year.

For the sake of comparison, here’s a rundown of the annual salaries paid to the top U.S. government officials, which range from $174,000 for rank-and-file Senators and Representatives to $400,000 (plus a $50,000 expense allowance) for the President. The Chief Justice and associate justices of the U.S. Supreme Court fall closer to the low end of the pay scale with annual salaries of $267,000 and $255,300, respectively.

It’s a time-honored—albeit somewhat misguided—tradition to call out executive pay among the largest government contractors. Strictly speaking, those eight-figure salaries among the top five are not coming directly out of taxpayers’ pockets.

Federal law sets limits on the type and amount of employee compensation—“wages, salary, bonuses, deferred compensation…, and employer contributions to defined contribution pension plans”—that contractors can charge the government. The cap on reimbursable compensation, which is adjusted every year pursuant to a formula, currently stands at $525,000 per fiscal year. Contracts awarded before June 24, 2014, however, are subject to a cap of $1.14 million. Additionally, under the current law, agency heads can waive the cap, and there is an exemption for contractor employees who are scientists, engineers, or “other specialists.” Most of the top honchos at the largest contractors are not scientists or engineers; thus, their generous pay packages probably don’t qualify for this exemption. The government can also deny reimbursement for any contractor cost—even employee compensation that falls below the cap—if it determines the cost is not reasonable.

The cap on reimbursable contractor compensation was dramatically lowered in 2013 through a change in the law—a reform the Project On Government Oversight had long championed. POGO and other government watchdogs had watched with alarm as the cap dramatically increased year after year. In one year alone, the benchmark had soared 25 percent, from $763,000 to $952,000. The new law chopped the threshold down to $487,000 (see section 702) and slowed its annual growth to a more modest rate of roughly 2 to 3 percent.

For some, the current law does not go far enough. Senator Sanders has proposed a more drastic solution. He introduced an amendment to next year’s defense authorization bill that would prohibit the Department of Defense from awarding contracts to companies that pay employees or officers annual compensation exceeding $203,700—the annual salary of the Secretary of Defense.

Senator Sanders and others who highlight exorbitant contractor salaries are justified in their concern, in that pay practices reflect the fiscal responsibility of companies to which taxpayers entrust so much money. But there are other problems in the contracting system requiring immediate action. To his credit, Sanders’ letter to Secretary Mattis also demands action to reduce contractor fraud and cost overruns. A concerted effort to crack down on contractor waste, fraud, and abuse also must address overpricing, contractors who perform poorly or cross the line of legality by performing inherently government functions, and ways to improve the suspension and debarment system.

With regard to contractor compensation, we need a comprehensive analysis of the effects of lowering the reimbursement cap. To our knowledge, there has never been an empirical study of whether the change is saving the government money, the effect it is having on companies’ willingness to do business with the federal government, and whether it is hindering contractors’ ability to attract and retain the “best and the brightest” employees—as the business community had warned. Are there any contracts still subject to the old statutory cap of $1.14 million? If so, how much employee compensation on those contracts is being paid by taxpayers? Furthermore, a large amount of data showing what contractors pay their five most highly compensated executives is not being reported in the federal spending website, as required by law.

Finally, it appears the Office of Management and Budget (OMB) is falling behind in its annual duty to report to Congress about agencies’ use of cap waivers and exemptions. The most recent report posted on the OMB’s website is from August 2016 and only covers developments through FY 2015. According to the report, no exceptions to the cap were made by agencies in FY 2014 since the law took effect on June 24, 2014, or in FY 2015.