The new guidance adopts the results of a recent case – The Techplan ASBCA 41470 – that cites the steps to take to evaluate the reasonableness of executive compensation. The Board set forth how compensation experts should market price executive compensation and should follow those procedures when practical. The process DCAA says the case puts forth is:

Determine the position to be evaluated.

Identify survey(s) of compensation for the position to be evaluated which match the company in terms of revenues, industry, geographic location and/or other relevant factors.

Update the surveys to a common data point for each year using escalation factors

Array the data from the surveys for relevant compensation elements at various levels of compensation such as the average (mean) or selected percentiles and develop a composite number for each. Use of other percentiles is necessary only if the contractor’s performance is measurably above or below average.

Determine which of the numbers to use for comparative purposes. In most cases average or median data should be utilized as an initial position. DCAA uses a 50 percentile.

Apply a range of reasonableness such as 10 percent to the number or numbers selected. It is DCAA’s policy to use a 10 percent range of reasonableness.

Adjust the actual total cash compensation for lower than normal fringe benefits (see our last issue for an example of how to calculate offsets for fringe benefits).

Compare the adjusted compensation to the range of reasonableness and question the difference.

{TAG_FORM_TITLE}