the WHITE HOUSEPresident Barack Obama

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Ending the Overpayment of Federal Contractor Executives

Summary: 
Last fall, the President called on Congress to scrap an outdated law that requires taxpayers to foot the bill for excessive payments to CEOs and other senior executives of companies that contract with the Government.

Last fall, the President called on Congress to scrap an outdated law that requires taxpayers to foot the bill for excessive payments to CEOs and other senior executives of companies that contract with the Government. Under certain Government contracts, the Government reimburses the contractor for its incurred costs – which includes salaries for employees. Congress put a cap on how much taxpayers would reimburse these executives in the 1990s, but that cap was tied to pay levels of the nation’s top private sector CEOs and other senior executives. As a result of skyrocketing CEO pay, the tab for taxpayers has soared to unreasonable heights in the intervening years. Unfortunately, Congress failed to reform the current reimbursement formula for contractor executives and, until it does, taxpayers will continue to foot a bill that is both unjustified and unnecessary.    

Here are the facts: since 1995, the Government has been required by statute to reimburse senior executives under Federal contracts up to the annu­al compensation for the top executives at large publicly-traded companies. In 2010, this meant that the Government had to reimburse up to nearly $694,000 – more than 2 ½ times the $250,000 the Government paid when the cap was first instituted in 1995. As a result of this rapid growth of private sector executive compensation over the past 15 years, taxpayers are being forced to reimburse contractors at a rate which has outpaced the growth of inflation and the wages of most of America’s working families – as well as the growth of Federal salaries.

The President believes that asking the American people to pay a 250 percent-plus raise for contracting executives just doesn’t make sense – especially in the current fiscal environment. He proposed to end this excessive reimbursement by abol­ishing the outdated statutory formula and instead bringing the cap down to a level on par with what the Government pays its own executives – approximately $200,000. Just as the Government must be prudent in paying its employees, it must also not overpay contractors. To be clear, the proposal does not limit how much contractors may pay their ex­ecutives – only how much the Government will reimburse them. 

In December, Congress passed a provision that made modest changes to the cap for contracts with the Department of Defense and a few civilian agencies. However, it failed to take the critical step of repealing the existing statutory formula for reimbursing executive pay – despite the efforts of a few strong Congressional advocates.

Under the law, OMB will soon be forced to publish a notice in the Federal Register that raises the cap even higher – tens of thousands of dollars above what it was in 2010 – and taxpayers will continue to have their hard-earned resources spent reimbursing contractor executives far in excess of what can be justified. 

The Administration is again calling on Congress to reform the statutory formula and lower the cap on the amount agencies must reimburse a contractor for the compensation of its employees. As part of the Obama Administration’s Campaign to Cut Waste, we have targeted inefficient spending in contracting across the Federal Government and finally put an end to the uncontrolled growth in contracting spending that occurred during the prior Administration. As part of these efforts, we must also stop overpaying contractors. We hope that, this year, Congress will adopt the Administration’s proposal and finally give our taxpayers the overdue relief they deserve. 

Lesley Field is Acting Administrator of OMB’s Office of Federal Procurement Policy