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Budget Takes on Contractor Compensation Cap

With Wednesday’s release of the President’s FY 2014 Budget, Beltway insiders are busily analyzing the numbers and noting increases and decreases in agency and program funding. A more comprehensive look at contracting provisions will be forthcoming, but the executive and contractor compensation cap provision is worth a quick mention today.

The President is urging Congress to reduce the contractor compensation cap from its current level of $763,000 (see p. 49):

Under current law, contractors that are paid based on their incurred costs may demand reimbursement for executive and employee salaries up to the level of the Nation’s top private sector CEOs and other senior executives. These salaries and benefits have increased by more than 300 percent since the law was enacted in the mid-1990s. In 2011, when the cap reached $763,000, the President called on the Congress to establish a new, sensible limit that is on par with what the Government pays its own executives and employees. The Administration was encouraged by the proposal in the 2013 Senate’s National Defense Authorization bill to cap reimbursement for defense contractors at the level of the Vice President’s salary, which is currently $230,700. The Budget urges the Congress to expand the Senate’s proposal to cover all contractor employees—both defense and civilian—and pass a law that allows agencies to pay above this cap on an exception basis only, when it is necessary to ensure the agency has continued access to the skills and capabilities of specialists to achieve mission outcomes.

The cap does not limit how much contractors can pay their ex­ecutives or employees—only how much the federal government will repay them. Private firms are free to compensate employees whatever they deem appropriate from private revenue streams. The President isn’t alone in thinking a reduction of the cap is necessary (although the exception to the rule reads like an industry press release): Members of Congress and the Project On Government Oversight and other nongovernmental organizations have also called for a reduction of the cap. And the State of New York has taken steps to reduce taxpayer-funded contractor compensation.

POGO expects that the issue will be raised again this session and hopes that it receives even stronger bipartisan support. The compensation formula is out of step with economic realities, and as a result, taxpayers are paying billions in contractor compensation that is above anything earned by federal employees—including the president—and the majority of the private sector.