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U.S. Congress poised to limit contractor pay: Is $487,000 a year enough?

A general view of the U.S. Capitol Dome in Washington, October 4, 2013. REUTERS/Jonathan Ernst
A general view of the U.S. Capitol Dome in Washington, October 4, 2013. REUTERS/Jonathan Ernst

By Andy Sullivan

WASHINGTON (Reuters) - Congress is poised to nearly halve the salary cap for U.S. government contractors after years of dramatic increases driven by skyrocketing executive pay.

A broad budget bill that won approval by the House of Representatives on Thursday would lower the cap to $487,000 a person, down from its current level of $952,000. The Senate is expected to pass the bill next week.

The measure would be a partial victory for the White House, which for years has sought to rein in contractor reimbursements that fund salary and other personnel costs. In May, the White House proposed limiting the reimbursement level to $400,000 a person - the amount Barack Obama earns as president.

At least 616 employees at contracting companies earned more than that last year, according to the Government Accountability Office.

The measure would apply to "cost-plus" contracts, which reimburse companies for work expenses plus a profit, but not to fixed-price contracts. Cost-plus contracts constitute about 40 percent of the $500 billion or so the government spends each year on goods and services.

Contracting companies like Lockheed Martin and SAIC may pay employees as much as they wish, but they are not reimbursed for salary or benefits exceeding the federal cap.

The cap was first set at $340,650 in 1998 and has risen dramatically since then, as has private-sector executive pay used as a comparison. The current formula is based on the median salary of the top five executives at some 3,000 public companies with revenues over $50 million.

The cap has more than tripled since 1998, far outpacing inflation and salary increases for non-executive employees. The earnings gap between contractors and federal employees has widened further in recent years because of a congressionally imposed wage freeze on government workers.

The budget bill that passed the House would lower the cap to $487,000 - equal to the original 1998 level, adjusted for inflation. Further increases will be based on the U.S. Employment Cost Index, which measures the growth of overall employee compensation, rather than executive salaries.

"I think we can all say with a straight face that's reasonable," said Scott Amey, general counsel for the Project on Government Oversight, a watchdog group. "I'd still like it to go a lot lower."

COMPETING FOR TOP TALENT

Contractors agree that the current cap is excessive. But they argue that lowering the cap could make it difficult for the government to compete for top-level private sector talent, especially in technology.

"We've recognized for a long time that the formula wasn't working," said Stan Soloway, president of the Professional Services Council, a trade association for government contractors. "But when you get up the food chain, the compensation is not equal to what's offered elsewhere."

Soloway said his group would have been satisfied with a higher cap of $625,000, which was included in a bipartisan defense-policy bill introduced on Monday. That proposed level was rendered moot by the budget bill.

The White House said that it supports the $487,000 cap, although it does not go as far as it had hoped.

"We are pleased that Congress is taking action to address the unjustifiably high contractor executive reimbursement required under current law," said Steve Posner, a spokesman for the White House's Office of Management and Budget.

(Reporting by Andy Sullivan; Editing by Marilyn Thompson, Cynthia Osterman and Eric Beech)

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