Under Section 803 of the recently-enacted National Defense Authorization Act for Fiscal Year 2012, Congress has extended the cap on allowable contractor executive compensation under Defense contracts– currently set at $693,951 annually (including total amount of wages, salary, bonuses and deferred compensation) – to “all contractor employees.”
Previously, the $693,951 limit only applied to contractors’ top five highest-paid executives. Under the new legislation, this limitation will apply to all employees whose labor is charged to government contracts. So, what does this mean for contractors.
Although contractors are not limited in what they can pay their employees, any compensation over the limit is unallowable under the Government’s cost accounting rules. In addition, even allowable amounts, like all costs, are subject to the requirements that the compensation be reasonable and allocable to firm’s government contracts.
Initially, the Senate and the Obama Administration also proposed lowering the cap to $400,000 (the President’s salary), but this was scrapped in favor of simply extending the cap to all contractor employees. Note, that the rule allows the Department of Defense to create an exemption for scientists and engineers – some of the highly-talented non-executive employees that the contracting community feared would be most affected by the compensation cap.
The restriction became effective on January 1, 2012 and will be implemented in the Federal Acquisition Regulation (FAR) in the next 180 days.