GAO United States General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-277209 July 8, 1997 The Honorable Barbara Boxer The Honorable Charles E. Grassley The Honorable Tom Ha&in United States Senate Subject: Impact of Legislative Compensation Caps on DOD Contracts In response to your request, we have developed information on the extent to which legislative caps have affected executive compensation allowable under Department of Defense (DOD) contracts. Specifically, we obtained compensation costs from the Defense Contract Audit Agency (DCAA) for McDonnell Douglas Corporation for 1995, the latest year of a completed DCAA incurred cost audit. We also obtained from DCAA nine other contractors’ estimates of the impact of legislative compensation caps on their companies. On June 3, 1997, we briefed your staff on the results of our work. This report summarizes the information provided at that briefing. BACKGROUND The Congress has placed various limitations on the amount of compensation costs that may be allowed on defense contracts. The fiscal year 1995 DOD Appropriations Act (P-L. 103-335) provided that, “After April 15, 1995, none of the funds provided in this Act may be obligated for payment on new contracts on which allowable costs charged to the government include payments for individual compensation at a rate in excess of $250,000 per year.” The fiscal year 1996 DOD Appropriations Act (P-L. 104-61) provided that, “None of the funds provided in this Act may be obligated for payment on new contracts on which allowable costs charged to the government include payments for individual compensation at a rate in excess of $200,000 per year after July 1, 1996. . .I’ GAO/NSIAD-97-182R Legislative Compensation Caps B-277209 The fiscal year 1997 DOD Appropriations Act (P.L. 104-208) provided that, “None of the funds provided in this Act may be obligated for payment on new contracts on which allowable costs charged to the government include payments for individual compensation at a rate in excess of $250,000per year.“’ RESULTS IN BRIEF The information we collected on McDonnell Douglas Corporation and nine other contractors indicates that the compensation cap imposed on DOD contractors for fiscal year 1995, had no significant effect on limiting executive compensation charged to defense contracts for 1995. For McDonnell Douglas Corporation, which had about $33.7 million in executive compensation in excess of $250,000, only about $313,000, or less than 1 percent, is estimated to be limited by the fiscal year 1995 compensation cap. Estimates by the nine other defense contractors of excess compensation costs subject to the fiscal year 1995 compensation cap range from 0.14 to 3 percent. The limited impact of the legislative compensation cap was primarily due to the short period the cap was in effect during 1995 (5-l/2 months) and the small amount of costs associated with new contracts entered into during this period using fiscal year 1995 appropriations. For some of the same reasons, the amount of executive compensation charged to defense contracts in fiscal year 1996 will not be significantly affected, although the amount determined to be unallowable will increase because both the fiscal year 1995 and 1996 limitations were in effect. McDonnell Douglas Corporation estimates that only about 3 percent of 1996 executive compensation in excess of the cap will be subject to the fiscal year 1995 and 1996 compensation caps. Aggregated data on the effect of the 1997 cap was not available at the time of our review. Enclosure I contains more information on our findings. AGENCY COMMENTS AND OUR EVALUATION DOD provided written comments on a draft of this report. DOD took no exception to the information provided in the report regarding the allowable cost impact of the statutory compensation caps. However, it commented on the substantial administrative burden imposed on both DOD personnel and defense contractors by the inconsistencies between the four different compensation caps enacted by the Congress over the past 3 years. ‘A statutory compensation limitation was also imposed by the Fiscal Year 1997 National Defense Authorization Act (P.L. 104-201) on both DOD and civilian government agencies, but this limitation affected fewer executives than that imposed by the Fiscal Year 1997 DOD Appropriations Act. 2 GAO/NSIAD-97-182R Legislative Compensation Caps B-277209 The nature and extent of the administrative burden was not the focus of our review. However, DOD identifies a pertinent issue. Generally speaking, it seems reasonable that more consistent treatment of compensation caps could ease implementation problems. DOD’s comments are provided in enclosure II. We are providing copies of this correspondence to the Secretary of Defense, the Director of the Office of Management and Budget, and other appropriate congressional committees and members. We will also make copies available to others on request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this briefing report. Major contributors to this report are Charles W. Thompson and Robert D. Spence. David E. Cooper Associate Director Defense Acquisitions Issues Enclosures - 2 GAO/NSIAD-97-182R Legislative Compensation Caps ENCLOSURE1 ENCLOSURE I INFORMATION ON LEGISLATIVE COMPENSATION CAPS GM Relevant DOD Compensation Caps Provided in Laws Act Cap Applicable to Covered compensation Undefined FY 1995 $250,000 DOD (applied to Appropriations total compensation} Undefined FY 1996 $200,000 DOD (applied to Appropriations total compensation) Undefined FY 1997 $250,000 DOD (applied to wages Appropriations and electve deferrals) Wages and elective FY 1997 $250,000 DOD deferrals Authorization and civiiian agencies aFor fiscal year 1997, the Federal Acquisition Regulation (FAR) interim rule applies to the top five senior officers. 4 GAO/NSIAD-97-I 82R Legislative Compensation Caps ENCLbSURE I ENCLOSURE I FAR Definition of Compensation Subject to Fiscal Year 1995 Cap l Salaries and wages l Directors’ and executive committee members’ fees l Bonuses (including stock bonuses) l Incentive awards l Employee stock options and stock appreciation rights l Employee stock ownership plans l Employee insurance l Fringe benefits l Contributions to pensions, other postretirement benefits, annuity, and employee incentive compensation plans l Allowances for off-site pay, incentive pay, location allowances, hardship pay, severance pay, and cost-of-living differential l Compensation for personal services under certain conditions 5 GAOINSIAD-97-182R Legislative Compensation Caps ENCLOSURE I ENCLOSURE I MO About McDonnell Douglas ..r l The McDonnell Douglas Corporation (MDC), headquartered in St. Louis, Missouri, manufactures military and commercial aircraft, missiles, and space :and electronic systems lMost of MDC’s work is under firm fixed-priced _ ^ :. contracts y;--. : Z’ ‘0 MDC sales were $14.3 billion in fiscal year 1995 and $13.8 billion in fiscal year 1996; approximately 70 percent of sales were to the U.S. government l MDC total employment was 63,873 in December 1996, including 649 employees at MDC’s headquarters off ice 6 GAO/NSIAD-97-182R Legislative Compensation Caps- ENCLOSURE I ENCLOSURE I w Percent of MDC Excess Compensation Covered by Cap in FY 1995 DCAA and Total contractor estimates Percent compensation of amounts in subject to in excess of excess of $250,000 cap $250,000 subject to FY 1995 compensation cap Headquarters off ice $13,365,275 $1 78,855a 1.34 Headquarters $33,748,375 $31 3,090b o.93c and component offices aDefense Contract Audit Agency (DCAA) recommended this amount based on the results of its audit. ‘MDC components voluntarily removed this amount from overhead cost submittals (subject to DCAA audit). ’ MDC estimates the percentage for 1996 to be less than 3 percent. 7 GAO/NSIAD-97-182R Legislative Compensation Caps ENCLOSURE I ENCLOSURE I MO MDC 1995 Compensation For Top Five Executives Executivea Amount’ 1 $4,012,833 2 3,920,559 3 2,383,974 2,303,713 I 5 2,238,966 $14,860,045 a Because these amounts differ from Securities and Exchange Commission filings, MDC requested that the names of the executives not be disclosed. bThese amounts represent compensation as defined by the FAR and differ from compensation reported in Securities and Exchange Commission filings. 8 GAO/NSIAD-97-182R Legislative Compensation Caps ENCLOSURE I ENCLOSURE I ~0 Other Contractor Estimates of Excess Compensation Covered by Cap in 1995 Percent of excess Contractor compensation subject to cap A 0.33 B 1.50 C 3.00 D 0.14 E 2.00 F 0.67 G 1.67 H 1.20 I 2.00 9 GAO/NSIAD-97-182R Legislative Compensation Caps ENCLOSUREII ENCLOSUREII COMMENTSFROM THE DEPARTMENTOF DEFENSE OFFICE OF THE UNDER SECRETARY OF DEFENSE 3OCO DEFENSE PENTAGON WASHINGTON DC 203013000 June 27, 1997 MI. Louis J. Rodrigues Director, Defense Acquisitions Issues National Security and International Affairs Division U.S. General Accounting Office Washington, DC 20548 Dear Mr. Rodrigues: This is the Department of Defense (DOD) response to the General hccounting Office (GAO) draft report, "IMPACT of LEGISLATIVE COMPENSATION CAP on DOD CONTRACTS," dated June 13, 1997 (GAO Code 707253/OSD Case 1387). While we take no exception to the information provided therein regarding the allowable cost impact of the statutory compensation caps, we are disappointed that your report does not also address the substantial administrative burden imposed on both DOD personnel and defense contractors by those caps. We believe that an appreciation of this probiem is essential for a complete understanding of the impact of the statutory compensation caps on DOD contracts. Much of th1.s administrative burden is directly attributable to the inconsistencies between the four different compensation caps enacted by the Congress over the past three years. These include the variations in cap amounts, periods of applicability, funding limitations, definitions of compensation, and universes of capped employees, as well as the disparate treatment of DOD and civilian agency contracts. Because of these complexities, defense contractors have found it extremely difficult and time-consuming to comply with the statutory compensation caps, which can actually necessitate the negotiation of multiple overhead rates for the same contractor fiscal year. Moreover, these same complexities have made DOD auditors and contract administrators' jobs of reviewing contractor compliance with the statutory compensation caps significantly more difficult. We appreciate the opportunity to focus attention on this important additional impact of the statutory caps on allowable contractor compensation Costs. Sincerely, Eleanor R. Spector Director, Defense Procurement (707253) 10 GAO/NSIAD-97-182R Legislative Compensation Caps Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Mastercard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 2534066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. For information on how to access GAO reports on the INTERNET, send an e-mail message with “info” in the body to: email@example.com or visit GAO’s World Wide Web Home Page at: httpY/www.gao.gov United States General Accounting Office Washington, D,C. 20548-0001 Official Business Penalty for Private Use $300 Address Correction Requested
Impact of Legislative Compensation Caps on DOD Contracts
Published by the Government Accountability Office on 1997-07-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)