(Editor’s Note.  About eleven years ago we wrote a three-part series on compensation for personal services based on an article written by Karen Manos.  Since then Karen, now with Gibson, Dunn & Crutcher LLP, wrote another article in the December 2007 issue of Briefing Papers.  We found the newer article updated many of the compensation areas previously covered to reflect both FAR changes and board decisions so we used her updated views to modify our earlier article.  This time we will not address the history of the salary caps applicable to executives of large companies nor the bases of government reviews and challenges of executive salaries of smaller companies since we have addressed these two issues several times in the past and plan to recount a case study challenging government assertions of unreasonable executive salaries soon.)

Employee compensation is the single largest element of cost by many contractors.  The government is, not surprisingly, quite interested where a significant subset of compensation, executive compensation, has become the number one area of audit scrutiny. The FAR cost principle 31.205-6, “compensation for personnel services” is the longest and most detailed of the FAR cost principles and holds the record for most revisions (over 32) in the last 15 years.

“Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred for services rendered by employees to the contractor during the period of contract performance. Compensation includes payments made or to be made in the future in the form of cash, corporate securities (e.g. stock, bonds) and other assets, products or services.”

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