oversight

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)

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
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