On June 26, 2013, the government published an interim rule that implements Section 803 of the National Defense Authorization Act for Fiscal Year 2012 by extending the application of the executive compensation benchmark from senior executives to all contractor employees working on Department of Defense, NASA, and Coast Guard contracts. The interim rule is effective as of its issuance date (June 26, 2013).
The executive compensation benchmark was established in 1998 by the Office of Federal Procurement Policy (“OFPP”) Act and is intended to reflect “the median amount of the compensation provided for all senior executives of all benchmark corporations for the most recent year for which data is available.” The Administrator, Office of Federal Procurement Policy, determines the executive compensation benchmark amount, which is published on the Office of Management and Budget website. The benchmark amount does not limit the amount of compensation that an executive may receive, but caps the amount that will be allowable under the FAR compensation cost principle (48 C.F.R. § 31.205-6(p)). The current benchmark amount is $763,029.
The executive compensation cap has been applied since its inception to senior executives of government contractors. “Senior executive” is defined as the Chief Executive Officer plus the four most highly compensated employees in management positions at the contractor’s headquarters and, if applicable, the five most highly compensated employees in management positions at each intermediate home office or segment that reports to the contractor’s headquarters. 48 C.F.R. § 31.205-6(p)(2)(ii). Section 803 of the FY12 National Defense Authorization Act expanded the applicability of the the compensation benchmark from just senior executives to all employees (with an exception for scientists and engineers). Pub. L. No. 112-81, § 803.
The June 26 interim rule implements the FY12 National Defense Authorization Act’s Section 803 extension of the executive compensation benchmark from senior executives to all employees. The rule’s applicability is limited to (1) employees working on Department of Defense, NASA, and Coast Guard contracts and (2) compensation costs incurred after January 1, 2012 under contracts awarded since the passage of the FY 2012 National Defense Authorization Act, which was December 31, 2011. The rule is being implemented through amendment of the FAR compensation cost principle at § 31.205-6(p).
Contractors might question the validity of this interim rule for those compensation costs that exceed the $763,029 cap and that were incurred on covered contracts awarded on or after December 31, 2011 but before the June 26, 2013 effective date of the interim rule. That is because the Allowable Cost and Payment clause found in cost-reimbursement contracts states that the government will make payments to contractors “in amounts determined to be allowable . . . in accordance with . . . [FAR] subpart 31.2 in effect on the date of this contract . . . .” 48 C.F.R. § 52.216-7(a) (emphasis added). Because FAR subpart 31.2 was not revised to extend the executive compensation benchmark cap to all employees until June 26, 2013, contractors could take the position that pursuant to the Allowable Cost and Payment clause, compensation costs exceeding the $763,029 cap for non-senior executives were allowable and not subject to the June 26 rule, until the actual issuance of the June 26 interim rule, at which time FAR subpart 31.2 – specifically, § 31.205-6(p) – was revised to apply the cap to all employees’ compensation.
Written comments on the interim rule must be submitted by August 26, 2013.
Contractors should be aware that the government issued a second rule on June 26, 2013 – a proposed, not interim, rule – that would extend the executive compensation benchmark to all employees working on Department of Defense, NASA, and Coast Guard contracts awarded prior to the December 31, 2011 passage of the FY12 National Defense Authorization Act. Recognizing that an earlier effort to apply the compensation cap to contracts awarded prior to the cap’s statutory authorization failed, see General Dynamics Corp. v. United States, 47 Fed. Cl. 514 (2000) and ATK Launch Systems, Inc., ASBCA No. 55395, 09-1 BCA ¶ 34118 (2009), the government is soliciting comments on its proposed rule prior to implementing the rule. Comments for the proposed rule are also due on August 26, 2013.