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Defense bill would lower reimbursement cap for contractor executive pay

Dec. 6, 2012 - 05:25PM   |  

Executive compensation for top defense contractors may continue to be in the millions of dollars, but less of it will be coming from taxpayers if a clause in the U.S. National Defense Authorization Act (NDAA) survives conference and is signed into law by President Obama.

The language, passed by the Senate Dec. 4, restricts the top amount the government will reimburse a defense company for the cost of an executive, pegging the number to limits set by the Office of Management and Budget for most federal employees. The effect would be a cut from a maximum of about $763,000 per employee today, to roughly $231,000, using 2012 numbers.

The three-quarters of a million dollar limit is currently set as an average of the compensation for large publicly traded companies. The limit does not stop companies from paying well above the reimbursable figure, rather, it caps the amount taxpayers contribute.

The 2012 cap jumped nearly 10 percent from 2011, when the maximum was $694,000. Proponents of the measure have pointed to the rapid growth in compensation, and the fact that the president only makes about $400,000. Opponents point to the increase in executive compensation nationally, saying that defense contractors will lose out on top talent without competitive compensation.

“It is interference in our ability to really draw the best and the brightest, and I think that’s ultimately what both the House and Senate want to see national security supported by,” said Marion Blakey, chief executive officer of the Aerospace Industries Association.

Blakey pointed to the lower margins for defense contractors compared with high-tech companies as limiting what companies can do to absorb greater compensation obligations.

“If you look, our profit margin is significantly lower, that’s nothing like you’d see in the high-tech companies,” she said. “What we’re concerned about is it doesn’t make any sense to take one sector, the defense contracting area, and impose the kind of caps that no one else has to operate under, because we compete against the high-technology sector for talent. That’s where we go. And no one is out there suggesting that Google, that Facebook, that the biotech companies should start capping.”

The comparison to tech companies is unfair, said Ben Freeman, national security investigator for the Project on Government Oversight.

“To say that these are direct comparisons is disingenuous,” he said. “They can still pay the executives whatever they want. This is just the amount that these contractors can bill the government for. This is not a way for big government to control the amount that executives are compensated.”

Precise figures for compensation reimbursement are hard to pin down, and the NDAA language includes a section requiring a report from the Defense Department within 120 days of enactment.

The actual savings will be minor compared to the larger budget concerns floating around Washington, said Rob Burton, a contracting law expert and partner at the law firm Venable.

“It looks good politically to say that the taxpayers are only going to pay for a certain percentage of the executive salary,” Burton said. “But the reality is, I don’t think it’s going to make a huge difference in cutting the deficit. As a matter of fact it’s not going to have any impact at all. Executives will continue to get the very same compensation packages or even more based on inflation. This is all about cosmetics and what is a good sound bite for the folks on the hill.”

But the precise figure is less important than the savings, Freeman said.

“It just doesn’t make sense that we’d pay an employee of a defense company more than the president,” he said. “We can debate back and forth over how much it will save, but the bottom line is that it will save taxpayer money.”

Blakey voiced optimism that the language will be eliminated in conference.

“We’re counting on this being something that is discussed in the conference,” she said, “something where you do see a compromise if not a realization that this isn’t a wise approach.”

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