The White House claims the cap on executive salaries that may be charged to government contracts “has soared to unreasonable heights.” Indeed, the benchmark has risen from $250,000 in 1995 (the first year the cap was effective) to just shy of $694,000 in 2010. OMB did not update the benchmark in 2011 even though it’s a requirement of the OFPP Act (41 U.S.C. 435) which imposed the cap.

It actually took significant research to discover that the current cap is actually $693,951. Apparently, $694,000 is just so much more impressive in print.

As originally enacted, the law imposed the cap only on the top five contractor executives. Over time, this has been interpreted to mean the top five executives in each business unit of a multi-segment contractor. This introduced an interesting paradox in very large corporations where the compensation of the number six person (and others) might significantly exceed the cap, but be completely allowable – or at least not capped by law.

Fiscal 2012 saw a number of proposed changes to this provision including one by the White House as part of the President’s deficit reduction proposal to drop the cap to $200,000. This is the amount earned by the most senior federal executives (cabinet secretaries). That proposal never went anywhere, but the Senate included a provision in the National Defense Authorization Act (NDAA) to drop the cap to $400,000, an amount equal to the President’s salary. The House included a provision in its version of the NDAA that left the current benchmark in place, but extended it to all contractor employees instead of just the top five.

In the end, the NDAA bill the President signed on December 31st included the House language. So, the cap remains at the benchmark set each year by OMB, but is now effective for all contractor employees.
And, the saga is not over yet. Senior Government officials are concerned the overdue OMB update of the benchmark may push it over $750,000 and the White House is once again calling for a dramatically lower cap. On January 31st, the acting head of the Office of Federal Procurement Policy (OFPP) posted an entry to the OMB Blog entitled “Ending the Overpayment of Federal Contractor Executives.” In it he called the current executive compensation benchmark “far in excess of what can be justified” and called on Congress to “abolish the outdated statutory formula” and tie the cap to the top salary of the Government executive pay schedule – $200,000.
Legislators from Senator Charles Grassley (R-IO) to Senator Barbara Boxer (D-CA) have echoed this call and in the current Congressional environment, it could happen!

As they say in the advertising business, “Watch this space.”