DEFENSE 

CONTRACTORS

Information on the 

Impact of Reducing 

the Cap on Employee 

Compensation Costs

Report to Congressional Committees

June 2013

GAO-13-566

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-566, a report to 

congressional committees

June 2013

DEFENSE CONTRACTORS 

Information on the Impact of Reducing the Cap on 

Employee Compensation Costs 

Why GAO Did This Study

Since the 1990s, federal law has 

placed a limitation, or cap, on the 

amount of employee compensation 

that contractors can charge to federal 

contracts. The cap increased by 63 

percent in real terms since first use of 

the current approach in 1998. The cap

was set at $693,951 in 2010 and 

$763,029 for 2011 and 2012.

The National Defense Authorization 

Act for Fiscal Year 2013 directed GAO 

to provide information on the effect of 

reducing the cap to the salary of the 

U.S. President or Vice President. GAO 

identified, among other things, (1) 

estimates of the number of employees 

of a sample of DOD contractors whose 

compensation would have exceeded a 

cap set at the salaries of either the 

U.S. President or Vice President and 

the amount of compensation that 

would not have been allowable and (2) 

the views of government and 

contractor representatives on potential 

effects of a reduction in the cap. GAO 

collected data from a 

nongeneralizable, stratified random 

sample of 10 large-tier, 10 mid-tier, 

and 10 small-tier contractors; reviewed 

relevant laws and regulations, and 

interviewed government and contractor 

representatives. Data on the number of 

employees affected by the cap was 

received from 27 of the 30 contractors; 

the three largest contractors in GAO’s 

sample did not provide these data.

GAO is not making any 

recommendations in this report. DOD 

and OMB commented on a draft, 

noting the need to pay reasonable 

compensation costs. DOD also cited 

the need for more research given

GAO’s sample size. GAO believes this

analysis provides valuable insights into 

potential effects of cap changes. 

What GAO Found

Reducing the cap to the President’s salary ($400,000) or the Vice President’s 

salary ($230,700) would have substantially increased the number of employees 

with compensation costs exceeding the cap in 2010-2012 (see figure). 

Estimated Number of Employees with Compensation Costs in Excess of Each Cap 

Level for 27 of the 30 Contractors Sampled Who Provided Data 

For 2010-2012, contractors identified over $180 million per year in compensation 

costs that would have exceeded a cap set at the President’s salary, and at least 

$440 million per year if set at the Vice President’s salary. Most affected 

employees were at large-tier companies; few small-tier companies had 

employees exceeding these caps. While employees with compensation costs in 

excess of the existing cap were all identified as executives by the contractors, 

reducing the cap would have increasingly affected compensation costs for 

individuals below the executive level.

Government representatives generally supported reducing the cap as a means to 

reduce the costs of Department of Defense (DOD) contracts, whereas industry 

representatives and most contractors identified negative effects that could result 

from reducing the cap. The Office of Management and Budget noted the growth 

in the cap has outpaced inflation and the rate of growth of federal salaries. DOD 

noted that it fully supported the principle of paying only reasonable compensation 

costs and some DOD officials supported reducing the cap, though DOD 

cautioned that there are limited data on the potential impacts of doing so and that

the impact on the defense industry would need to be carefully monitored and 

assessed. Industry associations and contractors representatives noted that the 

compensation they offer to their employees is generally based on market surveys 

of compensation paid by private sector companies. While acknowledging that a 

reduced cap would not preclude them from compensating their employees above 

the cap, contractor representatives noted that doing so would come at the 

expense of company profits, which in turn may result in challenges in attracting 

capital from the financial markets. They also noted that reducing the cap may 

affect companies’ ability to attract and retain top talent and, over the long term, 

lead companies to reassess their business and staffing models and potentially 

shift work or personnel from government business to their commercial sector.

View GAO-13-566. For more information, 

contact Timothy J. DiNapoli at (202) 512-4841

or dinapolit@gao.gov. 
Page i GAO-13-566 Contractor Compensation

Letter 1 

Background 5

Number of Contractor Employees with Compensation Costs in 

Excess of Reduced Caps 9

DOD Has Not Created an Exception for Scientists and Engineers 

but the Impact Is Minimal at the Current Cap Level 18

Government and Contractor Views on the Potential Effects of a 

Reduced Cap Differed 20

Agency Comments and Our Evaluation 24

Appendix I Objectives, Scope, and Methodology 26

Appendix II Grants of Stock Options or Restricted Stock to Contractor 

Employees 31

Appendix III Comments from the Department of Defense 32

Appendix IV GAO Contact and Staff Acknowledgments 33

Figures

Figure 1: Hypothetical Example of the Effect of the Compensation 

Cap on Two Executives 6

Figure 2: Change in the Compensation Cap from 1998 through 2011 9

Figure 3: Estimated Number of Employees with Compensation 

Costs in Excess of Each Cap Level (for 27 of the 30 

Contractors Sampled That Provided Data) 11

Figure 4: Estimated Number of Employees with Compensation 

Costs in Excess of Each Cap Level in 2011 for 7 Large-Tier 

and 10 Mid-Tier Contractors Reviewed 12

Figure 5: Estimated Percentage of Employees with Costs Allocated 

to U.S. Government Contracts Whose Compensation 

Costs Exceeded Each Cap Level (for 27 of the 30 

Contractors Sampled That Provided Data) 13

Contents 
Page ii GAO-13-566 Contractor Compensation

Figure 6: Estimated Number of Employees by Management Level 

with Compensation Costs in Excess of Cap Levels in 2011 

(for 27 of the 30 Contractors Sampled That Provided 

Data) 14

Figure 7: Estimated Compensation Costs in Excess of Each Cap 

Level (for 27 of the 30 Contractors Sampled That Provided 

Data) 15

Figure 8: Estimated Compensation Costs in Excess of Each Cap 

Level in 2011 for 7 Large-Tier and 10 Mid-Tier Contractors 

Reviewed 16

Figure 9: Estimated Percentage of Total Revenues from the U.S. 

Government Represented by Compensation Costs That 

Exceeded Each Cap Level (for 27 of the 30 Contractors 

Sampled That Provided Data) 17

Abbreviations

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency 

DPAP Defense Procurement and Acquisition Policy

DOD Department of Defense

FAR Federal Acquisition Regulation

NASA National Aeronautics and Space Administration

OMB Office of Management and Budget

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Page 1 GAO-13-566 Contractor Compensation

441 G St. N.W.

Washington, DC 20548

June 19, 2013

The Honorable Carl Levin

Chairman

The Honorable James Inhofe

Ranking Member

Committee on Armed Services

United States Senate

The Honorable Howard P. “Buck” McKeon

Chairman

The Honorable Adam Smith

Ranking Member

Committee on Armed Services

House of Representatives

Since the 1990s, federal law has placed a limitation, or cap, on the 

amount of contractor employees’ compensation costs that is allowed to 

be charged on federal government contracts. Compensation costs can 

include many elements, such as salary, bonuses, stock options, and 

employer contributions to pension plans, although under federal law and 

the Federal Acquisition Regulation (FAR), contractors are only allowed to 

charge some elements of compensation to federal government contracts. 

The Administrator for Federal Procurement Policy within the Office of 

Management and Budget (OMB) is responsible for determining the cap, 

which is calculated based on an analysis of the compensation of senior 

executives at large, publicly traded companies. This cap, currently set at 

$763,029, has increased in real terms by 63 percent since this approach 

was first used in 1998. The cap had only applied to certain senior 

contractor executives, but in 2012, legislation expanded the cap’s 

applicability to all contractor employees performing under contracts 

awarded by the Department of Defense (DOD), the Coast Guard, and the 

 
 

Page 2 GAO-13-566 Contractor Compensation

National Aeronautics and Space Administration (NASA).1

Section 864 of the National Defense Authorization Act for Fiscal Year 

2013 directed GAO to report to Congress on the effect of reducing the 

allowable costs of compensation to the salary of the U.S. President or 

that of the U.S. Vice President, which are currently $400,000 and 

$230,700, respectively.

This same 

legislation permits the Secretary of Defense to establish narrowly targeted 

exceptions to the cap for scientists and engineers, as needed.

2 This report provides (1) estimates of the number 

of employees of a sample of DOD contractors whose compensation 

would have exceeded a cap set at the salaries of either the U.S. 

President or Vice President, and the amount of compensation that would 

not have been allowable; (2) the status of DOD’s efforts to establish an 

exception for scientists and engineers and the extent to which scientists 

and engineers would be affected by reducing the cap; and (3) the views 

of government and contractor representatives on potential effects of a 

reduction in the cap. In addition, in response to a matter identified in 

Section 864 of the National Defense Authorization Act of 2013, appendix 

II includes information on the extent to which employees of DOD 

contractors included in this review received compensation in the form of 

vested or unvested stock options.3

To assess these objectives, we reviewed relevant laws, regulations, and 

guidance, and interviewed representatives from Defense Procurement 

and Acquisition Policy (DPAP), the Office of the Assistant Secretary of 

Defense for Research and Engineering, the Defense Contract Audit 

Agency (DCAA), the Defense Contract Management Agency (DCMA), 

OMB, selected contractors, and industry associations with knowledge of 

contractor compensation issues. We requested data from a stratified, 

random sample of 30 contractors that had received fiscal year 2012 

obligations in excess of $1 million on DOD contracts for non-commercial 

 

1

National Defense Authorization Act for Fiscal Year 2012, Pub. L. No. 112-81, § 803(a)(1) 

(2011). The expansion of the cap to all contractor employees does not apply to contracts 

awarded by other federal agencies.

2

Pub. L. No. 112-239, § 864. 

3

A stock option typically has a vesting requirement, meaning that the employee may 

exercise the stock option only after a specified period of time has passed. If an 

employee’s employment at a company terminates before the stock option has vested, the 

employee typically forfeits the unvested stock option upon termination.
 

Page 3 GAO-13-566 Contractor Compensation

items. Because the cap is concerned with cost-based contracts, we 

excluded commercial item contracts, as well as contractors that only had 

obligations on firm fixed price contracts and/or fixed-price with economic 

price adjustment contracts. We based our selection of contractors on data 

from USAspending.gov.4

We requested data on a number of items, including the estimated number 

of employees with compensation costs that would have been allowable 

but for the cap and exceeded the contractor fiscal year 2010 cap of 

$693,951; the fiscal year 2011 cap of $763,029; and, for fiscal year 2012, 

the amount of $763,029.

We selected contractors from four strata based 

primarily on fiscal year 2012 contract obligations: (1) contractors with 

obligations greater than $25 billion (2 contractors selected); (2) 

contractors with obligations between $2 billion and $25 billion (8 

contractors selected); (3) contractors with obligations between $15 million 

and $2 billion (10 contractors selected); and (4) contractors with 

obligations between $1 million and $15 million (10 contractors selected). 

This sample is not generalizable, but is designed to illustrate the potential 

impact that reducing the cap would have on contractors of varying sizes. 

For the purposes of this report, we refer to contractors from the first two 

selection groups as large-tier contractors, the third group as mid-tier 

contractors, and the fourth group as small-tier contractors. The 30 

contractors received about 25 percent of all fiscal year 2012 DOD 

contract obligations.

5

 

4

Other information we requested from 

contractors included data on the estimated number of employees whose 

compensation would have exceeded the cap had it been set at the 

salaries of the President and Vice President in fiscal years 2010-2012, 

the estimated number of contractor employees performing under 

government contracts who were granted stock options or restricted stock, 

and the potential effects of reducing the cap. In our data request, we 

asked for data on most questions for fiscal years 2010, 2011, and 2012. 

USAspending.gov is a free, publicly accessible website established by the Office of 

Management and Budget containing data on federal awards (e.g., contracts, loans, and 

grants) across the government. The Federal Procurement Data System-Next Generation, 

the primary government-wide contracting database, is one of the main data sources for 

this website.

5

The cap of $763,029 is for fiscal year 2011 and subsequent contractor fiscal years, 

unless and until revised by the Office of Federal Procurement Policy. At the time of this 

review it had not published a revised cap amount for 2012. Therefore, for the purposes of 

this review, we used the 2011 cap for analysis of 2012 data.
 

Page 4 GAO-13-566 Contractor Compensation

To simplify the data request, we collected for fiscal year 2011 information 

on some questions where we determined one year of information was 

sufficient to provide useful insights, such as questions related to the 

number of employees at different management levels and a question 

about employee job titles. In these instances, we chose fiscal year 2011 

rather than fiscal year 2012 to ensure that contractors would have the 

information available at the time of our request.

While we did not independently verify the contractor-reported data, we did 

take a number of steps to assess the reliability of the data. Specifically, 

we reviewed written responses provided by the contractors on the source 

of the data, when that data source was last reviewed or audited, steps 

taken by the contractor to ensure the accuracy and completeness of the 

data provided, critical assumptions made, and any known limitations on 

the reported data. We also looked for inconsistencies in the data, and 

followed up as necessary to resolve these inconsistencies. From these 

efforts, we believe the information is sufficiently reliable for the purposes 

of this report. Appendix I provides additional details on our scope and 

methodology.

We conducted this performance audit from January 2013 to June 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives, with one limitation. We 

received complete responses to our data request from 27 of the 30 

contractors in our sample—7 large-tier, 10 mid-tier, and 10 small-tier. The

three largest contractors from which we requested data—The Boeing 

Company, Lockheed Martin Corporation, and Northrop Grumman 

Corporation—provided responses to our questions regarding company 

size, revenue, compensation practices and the potential impact of 

reducing the cap to the salaries of the U.S. President or Vice President. 

However, these contractors did not provide data on the number of 

employees with compensation costs greater than the salaries of the U.S. 

President or Vice President or on the estimated amount of total 

compensation that would no longer be allowable at these cap levels. 

These three contractors collectively accounted for about 18 percent of all 

DOD obligations in fiscal year 2012. Without the data from these three 

contractors, our findings with regard to the first objective do not fully 

reflect the impact on the large-tier contractors. For the purposes of this 

report, data presented on our entire sample reflect responses of the 27 
 

Page 5 GAO-13-566 Contractor Compensation

contractors that provided us with complete data; these contractors 

accounted for 7 percent of DOD’s contract obligations in fiscal year 2012. 

Of the 27, data on large-tier contractors reflects responses from 7 

contractors.

In fiscal year 2012, DOD obligated approximately $360 billion on 

contracts for goods and services, such as major weapon systems, 

information technology, professional and administrative support, weapon 

system and base maintenance, and office supplies. DOD contracts with 

companies of varying size, structure, and type of business. For example, 

in terms of size, in 2012, the total number of U.S.-based employees at the 

30 companies selected for this review ranged between 10 and more than 

150,000. Some of these companies provide goods and services primarily 

to DOD, and some also provide goods and services to other federal 

agencies or the private sector. For example, the percentage of total 

revenues received from the government in 2012 among the companies 

included in this review ranged between 4 percent and 100 percent, with

24 of the 30 contractors reporting at least half of their revenues were 

received from the federal government.

Contractors can allocate and charge a number of costs to federal 

government contracts, including certain types and levels of compensation 

costs. The FAR identifies many elements of compensation, including 

salaries and wages, bonus and incentive compensation, pension costs, 

and fringe benefits such as sick leave, holidays, and employee insurance. 

Some compensation costs are considered allowable under government 

contracts, while others are considered unallowable. For example, 

compensation in the form of bonuses and incentives are allowable under 

certain conditions, such as that the basis for the award for a bonus or 

incentive payment is supported. Similarly, according to a DCAA official, in 

most cases, restricted stock (a form of long-term incentive that includes 

actual shares that are earned by continued employment with a company) 

is allowable, because the expense is fixed at the time the restricted stock 

is awarded. On the other hand, compensation calculated or valued based 

on changes in the prices of corporate securities or corporate security 

ownership, such as stock options, is unallowable.

In addition to certain types of compensation costs being unallowable, the 

cap set by the Office of Federal Procurement Policy can also limit the 

amount of compensation paid to certain contractor employees that can be 

charged to federal contracts. For purposes of the cap, the FAR defines 

compensation to include the total amount of wages, salary, bonuses, 

Background 
 

Page 6 GAO-13-566 Contractor Compensation

deferred compensation, and employer contributions to defined 

contribution pension plans, for the fiscal year, whether paid, earned, or 

otherwise accruing, as recorded in the contractor’s cost accounting 

records for the fiscal year. Because of the cap, there are compensation 

costs that might be otherwise allowable, but are unallowable because 

they exceed the cap. Figure 1 illustrates the impact of varying the cap on 

the allowable costs of compensation paid to two different executives for a 

company for which the only source of revenue was federal government 

contracts.

Figure 1: Hypothetical Example of the Effect of the Compensation Cap on Two 

Executives

In this hypothetical example, executive A was compensated a total of 

$900,000 in fiscal year 2011. However, since the cap limited allowable 

compensation costs to $763,029 in 2011, executive A’s compensation 

included $136,971 that was not allowable because it exceeded the cap. 

Executive B’s compensation was $600,000. Because $600,000 was 

below the level of the cap, executive B’s compensation was not subject to 

the cap. However, if the cap had been reduced to the salary of the 

President ($400,000), then both executive A and executive B would have 

received compensation that would be unallowable because of the 
 

Page 7 GAO-13-566 Contractor Compensation

reduced cap. While the cap limits the compensation costs that contractors 

can charge to government contracts, it does not limit what a company can 

compensate an employee.

To be allowable, the FAR requires that compensation costs be 

reasonable.6

As a part of its auditing responsibilities, DCAA may audit compensation 

costs for allowability, allocability, and reasonableness. DCAA policy is 

that compensation in total is considered reasonable if the contractor’s 

compensation is within a 10 percent range of the market level of 

compensation based on survey data.

In determining reasonableness, contracting officers can 

consider the extent to which an employee’s compensation is consistent 

with other companies that are similar in size, industry, geographic area, 

and/or other factors. It is possible that compensation costs may be lower 

than the cap, but not reasonable. For example, in the hypothetical 

example provided in figure 1, some of Executive A’s compensation costs 

beneath the $763,029 cap may not be considered reasonable, if, for 

example, employees performing similar work and in companies with 

similar characteristics are compensated at a much lower level.

7 When compensation costs at a 

contractor are significant, auditors can request assistance from a 

specialized compensation team within DCAA, which follows a defined 

process for evaluating the reasonableness of executive compensation. 

This specialized team within DCAA also supports the Office of Federal 

Procurement Policy in developing the cap.

Since 1998, the Administrator for Federal Procurement Policy has 

determined the cap on allowable compensation costs.8

 

6

FAR § 31.201-2(a)(1). 

The cap is set at 

the median amount of the compensation provided for the five most highly 

compensated employees of all publicly owned U.S. corporations with 

7

In many cases the market level of compensation is based on weighted average (or 

median) levels of compensation as reported in surveys. However, according to DCAA 

officials, DCAA may establish the market level of compensation at a level between the 25th

and 75th percentile compensation survey amounts based on overall contractor financial 

performance as indicated by a comparison to peer companies.

8

The Administrator determines the cap in consultation with the Director of DCAA and other 

officials of executive agencies as the Administrator considers appropriate. 41 U.S.C. § 

1127(b).

History of the Cap on 

Contractor Employee 

Compensation Costs 
 

Page 8 GAO-13-566 Contractor Compensation

annual sales in excess of $50 million for the most recent fiscal year for 

which data are available at the time of the determination. To help 

calculate the cap, DCAA contracts with an outside vendor, which collects 

and analyzes data submitted by corporations as part of the corporations’ 

annual filing to the Securities and Exchange Commission. DCAA officials 

stated the analysis includes data from more than 3,000 companies. 

DCAA reviews the data provided by the vendor, then recommends the 

cap level to the Office of Federal Procurement Policy, which publishes the 

cap in the Federal Register.

Until recently, the cap on compensation costs has only applied to the five 

most highly compensated employees in management positions at each 

home office and each segment of a contractor. However, the National 

Defense Authorization Act for Fiscal Year 2012 expanded the applicability 

of the limitation to all contractor employees performing under contracts 

awarded by DOD, the Coast Guard, and NASA.9 The act also provided 

that the Secretary of Defense may establish narrowly targeted exceptions 

for scientists and engineers, if it is determined that such an exception is 

needed to ensure DOD has continued access to needed skills and 

capabilities.10

The current cap was set at $763,029 and was published by the Office of 

Federal Procurement Policy on April 23, 2012. The $763,029 cap applies 

to costs incurred during the contractors’ fiscal year 2011 and to

subsequent contractor fiscal years, unless and until revised by the Office 

of Federal Procurement Policy. The cap has more than doubled since 

1998 in then-year dollars; when adjusted for inflation and measured in 

2011 dollars, the cap has increased by about 63 percent in real terms. 

Figure 2 shows how the cap has changed since the benchmarking 

formula was first established.11

 

9

Pub. L. No. 112-81, § 803(a)(1) (2011). 

10Pub. L. No. 112-81, § 803(a)(2) (2011).

11Prior to the establishment of the benchmark formula, Congress limited by periodic 

legislation the amounts that could be charged to the government for an individual 

contractor employee’s compensation on certain contracts. Appropriations Acts limited 

compensation on certain DOD contracts to $250,000 in 1995, $200,000 in 1996, and 

$250,000 in 1997. Department of Defense Appropriations Act, 1995, Pub. L. No. 103-335, 

§ 8117 (1994); Department of Defense Appropriations Act, 1996, Pub. L. No. 104-61, § 

8086 (1995); Omnibus Consolidated Appropriations Act, 1997, Pub. L. No. 104-208, § 

8071 (1996).
 

Page 9 GAO-13-566 Contractor Compensation

Figure 2: Change in the Compensation Cap from 1998 through 2011

Reducing the cap to the salaries of the U.S. President or Vice President 

would have substantially increased the number of employees with 

compensation above the cap in 2010-2012, and in turn, increased the 

amount of compensation costs that would have no longer been allowable 

under federal contracts.12

 

12While contractors in their responses generally excluded compensation cost data for 

parts of their businesses that performed very little or no work on U.S. government 

contracts, in some cases they did not isolate costs that were allocated to U.S. government 

contracts for employees in parts of their businesses that performed a mix of work. As a 

result, it is possible that some portion of compensation costs reflected in this report may 

not have been allocated to U.S. government contracts. 

Across the 27 contractors reviewed, fewer than 

200 employees in any one year had compensation costs over the existing 

cap, but this number would have increased to more than 500 if the cap 

had been set at the President’s salary, and to more than 3,000 if the cap 

had been set at the Vice President’s salary. At each cap level, most of 

Number of Contractor 

Employees with 

Compensation Costs 

in Excess of Reduced 

Caps 
 

Page 10 GAO-13-566 Contractor Compensation

these employees were reported at the large-tier contractors; very few 

were at small-tier contractors. All of the employees with compensation 

costs in excess of the existing cap were identified as executives.

However, reducing the cap would have increasingly affected individuals 

who were identified as being managers below the executive level, and in 

some cases, would have included individuals serving in non-management 

positions. With regard to compensation costs that would not have been 

allowable at the various cap levels in 2010-2012, the 27 contractors 

reported over $80 million per year in estimated compensation costs in 

excess of the existing cap level. Were the cap set at the President’s 

salary, this number would have risen to over $180 million, and at the Vice 

President’s salary, to at least $440 million per year. The majority of costs 

in excess of each cap was reported at the large-tier contractors.

Based on our analysis of data from the 27 contractors that provided 

detailed information, reducing the cap would have significantly increased 

the number of employees whose compensation exceeded the cap (see 

figure 3).

Estimated Number of 

Contractor Employees 

with Compensation Costs 

Subject to a Reduced Cap
 

Page 11 GAO-13-566 Contractor Compensation

Figure 3: Estimated Number of Employees with Compensation Costs in Excess of 

Each Cap Level (for 27 of the 30 Contractors Sampled That Provided Data)

For example, our analysis indicates that over the last three years, the 

contractors reported that in total less than 200 employees each year had 

compensation costs that exceeded the existing cap level; however, they 

reported more than 500 employees each year with compensation costs 

that exceeded the President’s salary, and over 3,000 employees each 

year had compensation costs that exceeded the Vice President’s salary.

Figure 4 shows that most employees with compensation exceeding the 

various cap levels were employed at large-tier contractors.
 

Page 12 GAO-13-566 Contractor Compensation

Figure 4: Estimated Number of Employees with Compensation Costs in Excess of 

Each Cap Level in 2011 for 7 Large-Tier and 10 Mid-Tier Contractors Reviewed

Note: Figure does not include responses from the 10 small-tier contractors we reviewed. Only three of 

these contractors had employees with compensation costs that exceeded the President’s or Vice 

President’s salary. 

As illustrated in figure 4, the seven large-tier contractors reported 

approximately three times as many employees with compensation costs 

that exceeded the President’s and Vice President’s salaries as did the 10 

mid-tier contractors, and more than five times as many employees with 

compensation costs that exceeded the existing cap. Small-tier contractors 

reported very few employees above any of the cap levels—with only 3 of 

the 10 small-tier contractors reporting an employee above any of the cap 

levels. In total, the 10 small-tier contractors we reviewed reported no 

employees in any year with compensation costs that exceeded the 

existing cap level, no more than two employees in any year with 

compensation costs above the President’s salary, and no more than five 

employees in any year above the Vice President’s salary.
 

Page 13 GAO-13-566 Contractor Compensation

Collectively, the 27 contractors reported that employees whose 

compensation exceeded the various caps represented 2 percent or less 

of their total number of employees who had costs allocable to government 

contracts (see figure 5).

Figure 5: Estimated Percentage of Employees with Costs Allocated to U.S. 

Government Contracts Whose Compensation Costs Exceeded Each Cap Level (for 

27 of the 30 Contractors Sampled That Provided Data)

The proportion of employees with compensation costs affected by the 

different cap levels would generally have been greater at the 7 large-tier 

contractors than the 10 mid-tier contractors reviewed. For example, in 

2011, at the 7 large-tier contractors, an estimated 2.4 percent of 

employees had compensation costs that would have exceeded the salary 

of the U.S. Vice President, whereas at the 10 mid-tier contractors, 1.4 

percent would have exceeded the salary of the Vice President.
 

Page 14 GAO-13-566 Contractor Compensation

Figure 6 illustrates the number of contractor employees at different 

management levels with compensation costs in excess of each cap for 

2011. Contractors included in this review categorized employees as either 

executives, non-executive managers, or other, non-management 

employees. 

Figure 6: Estimated Number of Employees by Management Level with 

Compensation Costs in Excess of Cap Levels in 2011 (for 27 of the 30 Contractors 

Sampled That Provided Data)

Note: Classification of employees at each management level was determined by the contractors 

reviewed.

All employees with compensation costs that exceeded the existing cap 

were identified as executives. Many of those above the existing cap were 

identified by their job title as corporate officers or executive vice 

presidents. As the cap is reduced, however, employees in non-executive 

management positions, or in some cases, those who would not be 

considered managers, were increasingly affected. For example, 

contractors reported that reducing the cap to the President’s salary would 

mean that 147 employees that they considered management, but not 

executives, would have been affected, as well as 32 non-management 

Almost Half the Employees 

Affected by Reducing the 

Cap to the Vice President’s 

Salary Would Not Have 

Been Considered 

Executives
 

Page 15 GAO-13-566 Contractor Compensation

employees. At this cap level, many employees were identified as senior 

vice presidents and vice presidents. At the Vice President’s salary, over 

one-third of the affected employees would have been considered nonexecutive management personnel, and approximately 10 percent would 

have been employees who contractors would not consider to be serving 

in a management position. Employees whose compensation exceeded 

the Vice President’s salary included program managers and directors, as 

well as others, such as systems engineers or intelligence analysts.

As the number of employees that would have been affected by reducing 

the existing cap increases, so too does the amount of compensation that 

would have no longer been allowable under government contracts. As 

illustrated in figure 7, the 27 contractors reported, in total, over $80 million 

in each year in estimated compensation costs that exceeded the existing 

cap level.

Figure 7: Estimated Compensation Costs in Excess of Each Cap Level (for 27 of the 

30 Contractors Sampled That Provided Data)

Amount of Compensation 

Cost Potentially Affected 

by a Reduced Cap
 

Page 16 GAO-13-566 Contractor Compensation

Note: The five most highly compensated employees in management positions at each contractor 

home office and segment accounted for approximately $67 million of the 2010 costs shown in the 

figure, $91 million of the 2011 costs, and $59 million of the 2012 costs.

Contractors identified over $180 million per year in compensation costs 

that would have exceeded a cap set at the President’s salary, and at least 

$440 million per year if set at the Vice President’s salary.

Large-tier contractors reported greater amounts of compensation costs 

that exceeded each of the cap levels than did mid-tier contractors, as 

shown in figure 8.

Figure 8: Estimated Compensation Costs in Excess of Each Cap Level in 2011 for 7 

Large-Tier and 10 Mid-Tier Contractors Reviewed

Note: Figure does not include responses from the 10 small-tier contractors we reviewed. Only 3 of 

these contractors had employees with compensation costs that exceeded the President’s or Vice 

President’s salary. 

As figure 8 illustrates, in 2011, the 7 large-tier contractors reported 

approximately twice as much compensation cost that exceeded the 

existing cap level than did the 10 mid-tier contractors. The large-tier 

contractors also reported more than three times as much compensation 
 

Page 17 GAO-13-566 Contractor Compensation

cost that exceeded the Vice President’s salary than did the mid-tier 

contractors, and more than twice as much compensation cost that 

exceeded the President’s salary. Small-tier contractors reported very 

small amounts of compensation cost above any of the cap levels.

Overall, across all 27 contractors, reported compensation costs in excess 

of any of the cap levels represented approximately 1 percent or less of 

the contractors’ total revenues from the U.S. government, as shown in 

figure 9. 

Figure 9: Estimated Percentage of Total Revenues from the U.S. Government 

Represented by Compensation Costs That Exceeded Each Cap Level (for 27 of the 

30 Contractors Sampled That Provided Data)

We found that compensation costs in excess of the existing cap were 

slightly higher as a percentage of revenues from the government for the 

10 mid-tier contractors than the 7 large-tier contractors, and slightly lower 

at the other two cap levels.
 

Page 18 GAO-13-566 Contractor Compensation

DOD has not established an exception for scientists and engineers as 

permitted under recent legislation and has no ongoing efforts to do so. 

DOD officials noted that few, if any, individuals whose compensation 

exceeds the current cap level are serving as a scientist or an engineer. 

DOD officials noted that if the cap were to be reduced, then it would 

consider the need for an exception for scientists and engineers at that 

point. While the ability to create exceptions had support from industry, 

contractor and industry association representatives identified a number of 

challenges that DOD could face in creating an exception for scientists and 

engineers. Both DOD and contractors expressed the need for an ability to 

create additional exceptions should the need arise.

The 2012 legislation expanding the cap on contractor compensation costs 

to all contractor employees also allowed the Secretary of Defense to 

establish narrowly defined exceptions for scientists and engineers to 

ensure that the DOD has access to critical skills and capabilities.13 As of 

April 2013, DOD had not established such an exception, and according to 

DPAP officials, there are no ongoing efforts to do so. DPAP officials 

explained that at the current cap of $763,029, few, if any, individuals 

whose total compensation exceeds that cap are serving as a scientist or 

engineer. DPAP officials also noted they believed this would continue to 

be the case even after DOD issues regulations to implement the 2012 

legislation to expand the cap to cover all contractor employees working 

under contracts awarded by DOD, the Coast Guard, and NASA.14

Were the cap to be reduced, however, DPAP officials noted that they 

would need to consider whether to establish an exception because the 

compensation of more individuals would be covered by the cap. DPAP 

officials told us that while no formal planning process is underway, among 

the options they could consider would be to approve an exception on a 

case-by-case basis based on a request from a contractor or from within 

DOD, or potentially on a broader class basis for scientists or engineers 

 

13Pub. L. No. 112-81, § 803(a)(2) (2011).

14The legislation required DOD to implement regulations within 180 days after enactment. 

DOD officials noted that DOD submitted two cases to the Federal Acquisition Regulatory 

Council to extend the compensation cap to all DOD, NASA, and Coast Guard employees

in 2012. Pub. L. No. 112-81, § 803(c)(1). As of April 2013, these cases were still being 

reviewed by the Office of Information and Regulatory Affairs, which is charged with 

reviewing proposed changes in federal regulations. 

DOD Has Not Created 

an Exception for 

Scientists and 

Engineers but the 

Impact Is Minimal at 

the Current Cap Level

DOD Has Not Created an 

Exception for Scientists 

and Engineers
 

Page 19 GAO-13-566 Contractor Compensation

that possess critical skill sets that are not widely available in the private 

sector. DPAP officials noted that these could include nuclear engineers 

with experience in designing propulsion systems or engineers with 

experience in space launch technologies. A senior official from DOD’s 

Office of the Assistant Secretary of Defense for Research and 

Engineering identified others, such as industrial engineers with cost 

estimating experience, who might merit consideration, especially if the 

economy improves. DOD officials also told us that in order for contractor 

employees to qualify for an exception, they would need to function as a 

scientist or engineer rather than be identified as such solely based on 

background or education.

While the ability to create exceptions had support from industry, 

contractors and industry groups noted that a key challenge in developing 

any exception would be how to identify and verify those who would 

qualify. For example, industry representatives told us that there might be 

added administrative requirements on the government and the industry to 

verify how particular employees spend their time in order to qualify for an 

exception. One contractor explained that using job titles to identify 

scientists and engineers would not be meaningful since it may or may not 

reflect an employee’s functional status as a scientist or engineer. In that 

regard, in our analysis of the data provided by contractors, we found that 

the number of scientists and engineers identified by the contractors was 

not always consistent with the number of contractor employees with 

“engineer” or “scientist” in their job title. For example, one contractor 

classified a total of 10 employees as scientists or engineers that would be 

affected by the various cap levels, but listed 33 employees over the cap 

with the word “engineer” or “scientist” in their job title. Another contractor 

listed 126 employees with compensation costs over the salary of the Vice 

President that had the word “scientist” or “engineer” in their job title, but 

chose not to classify any of these individuals as scientists or engineers, 

as they considered these scientists and engineers to be executives.

Similarly, industry representatives noted that if the exception were to be 

based on whether or not the individual performed a scientific or 

engineering function, then scientists and engineers that are promoted into 

supervisory or managerial positions may not qualify. Industry 

representatives noted these individuals often play critical functions in 

executing DOD programs, but may not necessarily be performing 

engineering or scientific tasks. For example, based on the data provided 

by the contractors for fiscal year 2011, if the cap were reduced to the 

salary of the Vice President, the majority of the scientists and engineers 

Contractor Perspectives 

on Challenges in Creating 

Exceptions 
 

Page 20 GAO-13-566 Contractor Compensation

that would have been affected were classified as serving in non-executive 

management positions. Industry representatives also noted that there is a 

growing trend to train employees to be able to perform multiple tasks and 

wondered how an exception would account for employees that spend 

their time performing engineering and/or financial tasks, supervising 

projects, and programming.

Both DOD and contractor representatives noted that the exception is 

limited to scientists and engineers, but there may be others providing 

valuable skills for the government and that these skills may change over 

time. DPAP officials noted that the legislation currently limits the ability to 

establish an exception to scientists and engineers and indicated that 

other specialties, such as surgeons in the medical profession, may also 

warrant an exception. These officials indicated that DOD would need to 

seek additional legislation if it determines a need to attract or retain such 

skills and capabilities. Similarly, contractor representatives noted they 

have employees who provide other types of critical skills to DOD, such as 

in the medical or cyber-security areas, and that these skills can shift over 

time. For example, they noted that previously there was a shortage of 

structural engineers which resulted in higher compensation levels for 

those employees, whereas currently software engineers are in high 

demand. Consequently, they suggested an ability to develop or modify 

exceptions to cover changing conditions would be beneficial.

Government and contractor representatives emphasized differing 

perspectives on the potential effects should the current cap be reduced to 

the salary of either the U.S. President or Vice President. Government 

representatives generally supported reducing the cap as a means to help 

reduce the costs of DOD contracts, whereas industry representatives and 

most contractors we reviewed emphasized potential negative impacts to 

reducing the cap.

OMB and DOD representatives generally supported a reduced 

compensation cap. OMB noted that the growth in the cap has outpaced 

the rate of inflation, the rate of growth of private sector salaries generally, 

and the rate of growth of federal salaries. OMB believed a reduced cap 

could bring pay parity between the amount taxpayers pay for senior 

executives of the federal government and the amount it pays contractors 

to reimburse the costs of compensation for senior executives who 

perform work for the federal government on certain types of contracts. 

OMB noted that the cap does not and would not limit the amount a 

Government and 

Contractor Views on 

the Potential Effects 

of a Reduced Cap 

Differed

Government 

Representatives Generally 

Supported Reducing the 

Cap
 

Page 21 GAO-13-566 Contractor Compensation

contractor compensates its employees; rather it limits how much 

taxpayers reimburse the contractors. OMB staff also noted that they 

support the idea of an exception for scientists and engineers to alleviate 

situations where the government should pay more than the capped 

amount to obtain the necessary talent.

DOD noted that it fully supported the principle of paying only reasonable 

compensation costs and some DOD officials supported reducing the cap, 

though DOD cautioned that there are limited data on the potential impacts 

of doing so and that the impact on the defense industry would need to be 

carefully monitored and assessed. DPAP officials stated that industry 

would still be able to access necessary talent and noted that many 

positions within defense companies involve skills and capabilities readily 

available in the commercial marketplace. However, they also stated that 

there are certain specialties that are critical to achieving DOD’s missions 

and that individuals in those specialties should be compensated 

appropriately. At the same time, DPAP officials stated that it is not DOD’s 

role to determine how much contractor employees are compensated. In 

terms of the administrative impact of a reduced cap on contract audit and 

oversight processes, DCAA and DCMA officials stated that they would 

expect additional workload associated with a reduced cap. For example, if 

the cap were set at the salary of the Vice President, DCAA officials noted 

they would need to evaluate whether individuals working on a single 

contract might have compensation costs that exceeded the cap.

Industry associations and many contractors questioned the premise of 

capping allowable contractor compensation costs at a set amount which 

is not based on market competition, emphasizing that standard industry 

practice is to benchmark employee compensation levels based on 

compensation levels for similar positions at their competitors and other 

private sector companies. In addition, an industry association noted that 

the FAR states that a cost is considered reasonable if it does not exceed 

“that which would be incurred by a prudent person in the conduct of 

competitive business,” and linked this statement to the defense industry 

practice of analyzing market trends in compensation.15

 

15FAR § 31.201-3(a). 

Industry Association and 

Contractor Views on 

Reducing the Cap
 

Page 22 GAO-13-566 Contractor Compensation

According to industry representatives and contractor representatives, 

defense companies generally obtain market survey information to aid in 

determining the appropriate compensation levels for a range of positions, 

not just senior executives. For example, the defense industry competes 

for highly specialized engineers, software engineers, and manufacturing 

specialists that help design, test, and manufacture DOD weapon systems. 

Other company representatives noted that the defense industry also 

competes with global industries of all types for highly qualified 

management personnel, including finance specialists, program managers, 

and other functional experts. Market survey information forms the basis 

for offers companies make to prospective new hires as well as changes in 

compensation designed to retain existing employees at all levels within 

the company. To be competitive for talent and manage total personnel 

costs to the company, industry associations and contractor 

representatives reported that defense companies typically target 

compensation levels at the median amount offered in the market for a 

given position, and have established ranges above and below that level 

that can be used to address specific circumstances. In that regard, an 

industry association provided summary benchmarking information that 

indicated the competitive compensation ranges for a variety of disciplines 

and positions, including those in engineering, finance, general 

management, information technology, general counsel, and 

manufacturing and quality assurance, exceeded the salary of the Vice 

President, and in some cases, exceeded both the salary of the President 

and the current cap. Industry representatives noted that the definition of 

compensation used in the summary benchmarking information differs 

from the definition of compensation used for the cap. As a result, it is not 

possible to directly compare the summary benchmarking information 

provided to the potential new cap levels.

Additionally, industry associations and contractor representatives cited a 

number of long-term negative impacts or potential unintended 

consequences of reducing the cap. For example, several contractor and 

industry representatives stated that even though a cap does not limit what 

the company can pay the employee, companies may consider limiting the 

compensation paid to their employees over the long term. These 

representatives noted that industry relies on capital markets to provide 

the capital necessary to operate and invest in future capabilities. To 

attract capital, the markets demand that industry match its cost structure 

to what its customers, such as the government, are willing to pay. If large 

numbers of employees were paid in excess of what is allowable under 

government contracts, then the companies’ cash flow would be disrupted

and the potential to generate earnings would be reduced. In turn, this 
 

Page 23 GAO-13-566 Contractor Compensation

condition would impair a company’s access to capital markets, and 

damage shareholder value. To mitigate the risk posed by this scenario, 

these representatives noted that a company may reduce the 

compensation levels for employees to reduce or eliminate the gap 

between what is paid to the employee and what is reimbursed by the 

government.

Similarly, several contractors stated their view that companies’ ability to 

attract and retain the most highly talented individuals may be reduced if 

the company limits their compensation, particularly once they become 

most valuable in terms of their skills and expertise. Some contractors 

further noted that if government contractors are unable to attract and 

retain top talent, this may result in a lower quality of products and 

services provided to the government. For example, one industry 

association representative stated that knowledgeable, practiced, and 

compensated talent can more efficiently and effectively address complex 

issues as opposed to less experienced talent.

More generally, companies also noted that reducing the cap might 

encourage companies to shift away from defense or other government 

contract work to commercial work. For companies with both commercial 

and government work, some company representatives stated that 

assigning the company’s best talent to the commercial side of the 

business may become a more prudent business decision because of the 

ability to recover the total costs of an employee’s compensation; 

contractor employees who have a choice may also opt not to work on 

government contracts to avoid potential constraints on compensation. 

They also stated their view that, if this were the case, then the 

government may not have access to the skills and capabilities needed to 

successfully produce or deliver high-quality, technologically advanced 

goods and services to DOD.

While industry associations and many of the large-tier and mid-tier 

contractors expressed concerns should the cap be reduced, most smalltier companies we reviewed generally stated they would either be only 

minimally affected or not affected should the cap be reduced because 

they generally did not offer compensation above the Vice President’s 

salary.
 

Page 24 GAO-13-566 Contractor Compensation

OMB’s e-mailed response stated that the compensation amounts 

identified in the report underscore the need for action to reform the cap. 

OMB stated that it has sent a legislative proposal to Congress that would 

abolish the current formula for calculating the cap, tie the level of the cap 

instead to the President’s salary, and apply it to all employees for both 

defense and civilian cost reimbursement contracts. OMB also stated that 

savings from lowering the cap would be substantially higher than the 

$180 million cited in the report as compensation costs exceeding the 

President’s salary, since the contractors included in the sample account 

for 7 percent of DOD’s fiscal year 2012 contract obligations. OMB also 

provided technical comments, which were incorporated into the report as 

appropriate. 

DOD provided written comments on a draft of this report. DOD stated that 

the report provides a significant amount of information, but expressed 

concern that it is based on a relatively small sample of DOD contractors 

and cited a need for additional research to determine what constitutes 

reasonable employee compensation costs. DOD also stated that, while it 

fully supports the principle of paying only reasonable compensation costs, 

it must avoid a policy that would drive away the talent needed to maintain 

strategic advantage and the national industrial base. DOD’s comments 

are reprinted in appendix III. 

We noted in the report that our sample was not generalizable and that 

some findings, particularly those associated with the impact that the 

potential reductions of the cap may have on the large-tier contractors, are 

limited since the three largest contractors selected did not provide 

requested data. Nevertheless, we believe the report provides valuable

insights into the potential implications of changes in the cap. These 

insights include (1) how the cap levels would have affected selected 

large-tier, mid-tier, and small-tier contractors differently, both in terms of 

numbers of employees affected and the amount of compensation costs 

considered unallowable, and (2) how, as the cap is lowered, more 

employees in non-executive positions would have been affected at these 

contractors.

Agency Comments

and Our Evaluation
 

Page 25 GAO-13-566 Contractor Compensation

We are sending copies of this report to interested congressional 

committees, the Secretary of Defense; the Director of the Office of 

Management and Budget; and other interested parties. This report will 

also be available at no charge on GAO’s website at http://www.gao.gov. 

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact 

points for our Offices of Congressional Relations and Public Affairs may 

be found on the last page of this report. Key contributors to this report are 

listed in appendix IV. 

Timothy J. DiNapoli

Director

Acquisition and Sourcing Management
Appendix I: Objectives, Scope, and 

Methodology

Page 26 GAO-13-566 Contractor Compensation

Section 864 of the National Defense Authorization Act for Fiscal Year 

2013 directed GAO to report to Congress on the effect of reducing the 

allowable costs of compensation to the salary of the U.S. President or 

that of the U.S. Vice President, which are currently $400,000 and 

$230,700, respectively.1 This report provides (1) estimates of the number 

of employees of a sample of Department of Defense (DOD) contractors 

whose compensation would have exceeded a cap set at the salaries of 

either the U.S. President or Vice President, and the amount of 

compensation that would not have been allowable; (2) the status of 

DOD’s efforts to establish an exception for scientists and engineers and 

the extent to which scientists and engineers would be affected by 

reducing the cap; and (3) the views of government and contractor 

representatives on potential effects of a reduction in the cap. In addition, 

in response to a matter identified in Section 864 of the National Defense 

Authorization Act of 2013, appendix II includes information on the extent 

to which employees of DOD contractors included in this review received 

compensation in the form of vested or unvested stock options.2

To assess these objectives, we reviewed relevant laws (e.g., National 

Defense Authorization Act for Fiscal Year 2012 (Pub. L. No. 112-81, § 

803(a)(1) (2011)), National Defense Authorization Act for Fiscal Year 

1998 (Pub. L. No. 105-85, § 808(a)(1) (1997)), regulations (e.g., Federal 

Acquisition Regulation (FAR) Subpart 31.2—Contracts with Commercial 

Organizations), and guidance (e.g., Defense Contract Audit Agency 

(DCAA) Contract Audit Manual Chapter 6 (Incurred Costs Audit 

Procedures)) and interviewed representatives from Defense Procurement 

and Acquisition Policy, the Office of the Assistant Secretary of Defense 

for Research and Engineering, DCAA, the Defense Contract 

Management Agency, the Office of Federal Procurement Policy within the 

Office of Management and Budget, selected contractors, and industry 

associations with knowledge of contractor compensation issues, including 

the Aerospace Industries Association, Financial Executives International, 

Professional Services Council, and TechAmerica.

 

1

Pub. L. No. 112-239, § 864. 

2

A stock option typically has a vesting requirement, meaning that the employee may 

exercise the stock option only after a specified period of time has passed. If an 

employee’s employment at a company terminates before the stock option has vested, the 

employee typically forfeits the unvested stock option upon termination.

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 27 GAO-13-566 Contractor Compensation

We also requested data from a stratified, random sample of 30 

contractors on a number of items related to each objective. Detailed 

information on how we selected the 30 contractors is included below. In 

our data request, we asked for data on most questions for fiscal years 

2010, 2011, and 2012. To simplify the data request, we collected for fiscal 

year 2011 information on some questions where we determined one year 

of information was sufficient to provide useful insights, such as questions 

related to the number of employees at different management levels and a 

question about employee job titles. In these instances, we chose fiscal 

year 2011 rather than fiscal year 2012 to ensure that contractors would 

have the information available at the time of our request. While we did not 

independently verify the contractor reported data, we did take a number 

of steps to assess the reliability of the data. Specifically, we reviewed 

written responses provided by the contractors on the source of the data, 

when that data source was last reviewed or audited, steps taken by the 

contractor to ensure the accuracy and completeness of the data provided, 

critical assumptions made, and any known limitations on the reported 

data. We also looked for inconsistencies in the data, and followed up as 

necessary to resolve these inconsistencies. From these efforts, we 

believe the information is sufficiently reliable for the purposes of this 

report.

In addition to the tasks performed that were relevant to all objectives, we 

performed the following tasks specific to each objective:

• To determine the extent to which DOD contractors would be affected 

by reducing the cap to the salaries of the President and Vice 

President, we collected and analyzed data from selected contractors 

on the estimated number of employees with compensation costs that 

would have been allowable (as determined by the contractors) but for 

the cap and exceeded the contractor fiscal year 2010 cap of 

$693,951; the fiscal year 2011 cap of $763,029; and, for fiscal year 

2012, the amount of $763,029.3

 

3

The cap of $763,029 is for fiscal year 2011 and subsequent contractor fiscal years, 

unless and until revised by the Office of Federal Procurement Policy. At the time of this 

review it had not published a revised cap amount for 2012. Therefore, for the purposes of 

this review, we used the 2011 cap for analysis of 2012 data.

We also collected data on the dollar 

amounts of compensation costs for these employees that would have 

been considered unallowable in 2010, 2011, and 2012 by virtue of 

exceeding either the current cap, the salary of the President, or that of 
Appendix I: Objectives, Scope, and 

Methodology

Page 28 GAO-13-566 Contractor Compensation

the Vice President. To provide insight into the types of employees 

affected, we also collected information on the titles of the individuals 

who would have exceeded those three potential cap levels in 

contractor fiscal year 2011, as well as on whether the contractor 

would have classified affected employees as executives, nonexecutive management, or non-management.

• To determine the status of DOD’s exception for scientists and 

engineers and the extent to which scientists and engineers would be 

affected by reducing the cap, we interviewed DOD officials on the 

status of and/or plans for establishing an exception and to whom such 

an exception might apply. We collected and analyzed data from 

selected contractors on the number of employees the contractor 

would have classified as scientists and engineers, based either on 

function, education, or background, and information on the proportion 

of these scientists and engineers considered executives, nonexecutive management, or non-management for contractor fiscal year 

2011. We also interviewed other government representatives, industry 

associations, and selected contractors to identify the potential impact 

of reducing the cap on scientists and engineers and other highly 

skilled professionals.

• To determine government and contractor representatives’ views on 

the potential impacts of reducing the cap, we interviewed government 

representatives and industry associations. We also analyzed 

qualitative responses obtained as a part of our data request from 

contractors selected for review on the potential impacts of reducing 

the cap.

To determine the extent to which contractor employees received 

compensation in the form of stock options, we reviewed regulations (e.g., 

FAR § 31.205-6(i)) and guidance (e.g., DCAA Contract Audit Manual 7-

2123) governing the allowability of stock options and other stock related 

compensation. We collected and analyzed data from selected contractors 

on the number of contractor employees performing under government 

contracts who were granted stock options, and the number of contractor 

employees performing under government contracts who were granted 

restricted stock, for contractor fiscal years 2010, 2011, and 2012.

To obtain data for each of the objectives, we selected a stratified, random 

sample of 30 contractors that had received fiscal year 2012 obligations in 

excess of $1 million on DOD contracts for non-commercial items. 

Because the cap is concerned with cost-based contracts, we excluded

commercial item contracts, as well as contractors that only had 

obligations on firm fixed price contracts and/or fixed-price with economic 

Contractor Selection 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 29 GAO-13-566 Contractor Compensation

price adjustment contracts. We based our selection of contractors on data 

from USAspending.gov.4

We divided the contractors into four strata: contractors with fiscal year 

2012 obligations (1) greater than $25 billion; (2) between $2 billion and 

$25 billion; (3) between $15 million and $2 billion with primarily non-small 

business dollar obligations; and (4) between $1 million and $15 million 

with obligations that were primarily small business dollars. All contractors 

in the first stratum were selected (2 total). The 19 contractors in the 

second stratum were divided into those that primarily provided products 

and those that primarily provided services, and 4 contractors were 

randomly selected from each of those groups (8 total). Ten contractors 

were randomly selected from the third stratum, and another 10 

contractors were randomly selected from the fourth stratum. For the 

purposes of this report, we refer to contractors from the first two selection 

groups as large-tier contractors, the third group as mid-tier contractors, 

and the fourth group as small-tier contractors. The 30 contractors 

received about 25 percent of all fiscal year 2012 DOD contract 

obligations. We randomized the full lists of contractors at each stratum 

before making the selection, anticipating that certain contractor 

characteristics not evident at the time of randomization may require 

exclusion from the sample. This approach allowed us to move to the next 

contractor on the list in cases where contractors did not meet criteria for 

selection, while still maintaining a random selection process. Reasons for 

exclusion included the contractor being a non-profit, imperfections in the 

data (e.g., the Department of Energy being listed as a company), or the 

contractor not being incorporated in the United States. This sample is not 

generalizable, but is designed to illustrate the potential impact that 

reducing the cap would have on contractors of varying sizes.

We conducted this performance audit from January 2013 to June 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

 

4

USAspending.gov is a free, publicly accessible website established by the Office of 

Management and Budget containing data on federal awards (e.g., contracts, loans, and 

grants) across the government. The Federal Procurement Data System-Next Generation, 

the primary government-wide contracting database, is one of the main data sources for 

this website.
Appendix I: Objectives, Scope, and 

Methodology

Page 30 GAO-13-566 Contractor Compensation

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives, with one limitation. We 

received complete responses to our data request from 27 of the 30 

contractors in our sample—seven large-tier, 10 mid-tier, and 10 small-tier. 

The three largest contractors from which we requested data—The Boeing 

Company, Lockheed Martin Corporation, and Northrop Grumman 

Corporation—provided responses to our questions regarding company 

size, revenue, compensation practices and the potential impact of 

reducing the cap to the salaries of the U.S. President or Vice President. 

However, these contractors did not provide data on the number of 

employees with compensation costs greater than the salaries of the U.S. 

President or Vice President or on the estimated amount of total 

compensation that would no longer be allowable at these cap levels. 

These three contractors collectively accounted for about 18 percent of all 

DOD obligations in fiscal year 2012. Without the data from these three 

contractors, our findings with regard to the first objective do not fully 

reflect the impact on the large-tier contractors. For the purposes of this 

report, data presented on our entire sample reflect responses of the 27 

contractors that provided us with complete data; these contractors 

accounted for 7 percent of DOD’s contract obligations in fiscal year 2012. 

Of the 27, data on large-tier contractors reflects responses from 7 

contractors.
Appendix II: Grants of Stock Options or 

Restricted Stock to Contractor Employees

Page 31 GAO-13-566 Contractor Compensation

Across the large-tier and mid-tier contractors included in this review, 

seven reported their company granted stock options (vested or unvested) 

to employees with compensation costs allocated to U.S. government 

contracts in any of the years covered. These contractors granted stock 

options on average to between 0.6 percent and 0.9 percent of employees, 

depending on the year. Nine of the contractors reported granting 

restricted stock to employees. These contractors granted restricted stock 

on average to between 0.8 percent and 1.2 percent of employees, 

depending on the year. No small-tier contractor included in this review 

reported granting stock options or restricted stock to any employees 

during the years covered.

Appendix II: Grants of Stock Options or 

Restricted Stock to Contractor Employees
Appendix III: Comments from the Department 

of Defense

Page 32 GAO-13-566 Contractor Compensation

Appendix III: Comments from the 

Department of Defense
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 33 GAO-13-566 Contractor Compensation

Timothy J. DiNapoli, (202) 512-4841 or dinapolit@gao.gov

In addition to the contact named above Karen Zuckerstein (Assistant 

Director), Robert Bullock, Virginia Chanley, John Crawford, Danielle 

Greene, Julia Kennon, John Krump, Janet McKelvey, and Roxanna Sun 

made key contributions to this report.

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(121116)
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