The guidance states that some contractors will propose that their executives should receive more compensation than the 110 percent of average compensation paid by comparable firms. These above average proposals are often expressed as using different percentiles such as 75 percentile. The guidance indicates such a proposal for an executive’s salary may be justified when there is clearly superior performance documented by financial performance that significantly exceeds the particular industry average. The guidance incorporates another ASBCA case, Information Systems & Networks Corp., ASBCA 47849, which established the 75 percentile was justified by performance using certain financial metrics. Examples cited in the case included:

Revenue Growth

Net Income

Return on Equity

Return of Assets

Return on Sales

Earnings per Share

Return on Capital

Cost Savings

Market Share

The superior performance measure by the chosen metric(s) should be a result of the executive’s efforts being evaluated. Auditors are told to consider multiple metrics so, for example, revenue growth due to acquisition while operations were conducted at a loss should not be considered superior performance. Also, use of the metric should be applied consistently over a period of years so when the performance level decreases or increases the corresponding level of what is reasonable compensation will also change.

Auditors are told to be particularly sensitive to payments for termination and subsequent consulting agreements. A senior executive should not claim compensation for voluntarily terminating themselves. Severance payments apply only to involuntary terminations. When the executive receives payments for consulting services the auditor is told to examine the termination agreement and ensure the consulting payments are commensurate with services expected from the retiree and do not represent unallowable compensation payments.

The new guidance also incorporate recent DFARS 231.205-6(f)(1) changes covering bonuses or other payments in excess of the employee’s normal salary that are part of restructuring costs associated with a business combination. The auditor is reminded this limitation does not apply to severance and early retirement incentive payments where the FAR provides these are allowable costs.

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