(Editor’s Note. Audit guidance on contractors’ compensation practices has been extensively revised over the last year and a half. Areas receiving most revisions are how contractors determine appropriate levels of compensation (e.g. internal controls) as well as how to assess the reasonableness of compensation for various categories of employees. The effect of these changes is to expand the scope of compensation reviews at large contractors and initiate various types of reviews at mid-sized and smaller contractors. The "revisions and clarifications" are the most extensive changes we have seen DCAA make in one area and we thought it would be a good idea to inform our readers of some of the important ones since they are more likely than ever to undergo some level of compensation review.

We intend to parse this topic into "adequate controls", how DCAA evaluates compensation levels of non-senior categories of labor (last issue) and senior executives in this article. We have used Chapter 6-414 in the July 2000 edition of the DCAA Contract Audit Manual (DCAM) and our own experience first working on special compensation teams in our prior lives as DCAA auditors and then as consultants helping contractors challenge government assertions of excess compensation. We recognize this series of articles will be of interest to other functional areas of your organization (e.g. human resources, project management, business owners, etc.) so feel free to reproduce and distribute them to people you feel will benefit.)

The guidance on reviewing senior executive compensation for reasonableness should not be confused with applying senior executive compensation ceilings set by the government since 1995 and revised each year (see our three part series on executive compensation ceilings in the GCA DIGEST Vol. 1, Nos. 2-4). The new guidance emphasizes that though the compensation may not exceed the FAR and DFARS caps on senior managers, the compensation levels for certain high risk employees may still exceed what is considered reasonable for companies of similar size. These two quite distinct sets of criteria derives from the fact that the senior executive ceilings are derived from salaries of publicly traded companies with at least $50 million in sales and are intended to be the highest allowable rates for larger companies. The government has decided that reasonable compensation at smaller companies should be lower and auditors have adopted the guidance discussed below for these companies. There is no guidelines on which criteria should be applied to what size companies but we have seen a significant increase in review of "high risk" employees using the guidance discussed below.

{TAG_FORM_TITLE}