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OFPP Pretends to Grudgingly Raise Contractor Executive Compensation Cap by 10 Percent

Last week, the Office of Federal Procurement Policy (OFPP) raised the amount the federal government will reimburse or price into government contracts for contractor executive compensation to $763,029. The previous cap was $693,951, and the cap has been the subject of many attacks by Congress. Previously, the Obama Administration has stated that the cap should be reduced to $200,000, which would be in line with the pay of Cabinet officials.

What is most surprising about the increase in the cap is how it contrasts with the language contained in the Federal Registernotice. Despite the increased cap, OFPP goes to great lengths to point out that the cap “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.” The notice also calls attention to the substantial increase to the cap over the years and asks Congress to protect taxpayers from paying this ever increasing contractor subsidy. In fact, the cap could be adjusted again to approximately $800,000 for the current fiscal year.

OFPP claims that it had no choice but to raise the cap, as the statute that authorizes setting the cap states that it will be determined annually. However, OFPP has rarely felt constrained in interpreting statutes in a manner most advantageous to interested parties, primarily contractors in this case. It has for example, shown no similar compulsion to require contractor inventories or provide insourcing guidance despite the existence of statutory language.

Moreover, OFPP’s own Federal Register notice has always hedged on setting higher compensation caps by explicitly stating, “This amount is for contractors’ FY [insert year] and subsequent contractor fiscal years, unless and until revised by OFPP.” In other words, OFPP has always reserved the administrative right not to increase or change the dollar cap on contractor compensation from one year to the next. It has been using this language since at least the late 1990s. It’s curious that in light of the Administration’s expressed desire to actually lower the cap, that the ever contractor-friendly OFPP would be allowed to continue in its errant ways.

In addition to a reduction of the cap, there is some unfinished business for Congress, as the Defense Department and civilian agencies are operating under different contractor compensation rules. Last month, Senators Barbara Boxer (D-CA) and Charles Grassley (R-IA) proposed the Commonsense Contractor Compensation Act of 2012 (S. 2198) to reduce taxpayer reimbursement of government contractor compensation. The bill would apply a $400,000 compensation cap (the annual salary paid to the President) to all contractor employees, not just defense contractor employees, as was mandated in the 2012 Defense Authorization bill (see Sec. 803).

The basic problem with ever-rising statutory executive compensation formula used by OFPP in setting the cap is that it appears to inappropriately include profit-based incentive compensation payments in the “cost determination” calculation. This has the obvious effect of distorting the cost determination by including profit-based payments as a part of “contract cost.” Compensation based on meeting financial performance indicators is more appropriately paid from corporate earnings or equity rather than as a base contract cost passed onto taxpayers.

POGO has supported all efforts to reduce the cap. There have been many efforts to cut federal workers, freeze federal salaries, and reduce federal employee benefits, but little is being done to diminish the more than $320 billion spent on service contracts each year.