Alert Concerning Compensation Consultant Results

DCAA issued an alert addressing concerns about executive compensation reasonableness when a contractor uses a compensation consultant. The guidance notes contractors frequently use compensation consultants to establish executive pay and states these consultants may not be independent, especially when they perform other services for the contractor. Auditors are told not to rely on the consultant’s determination on reasonableness of compensation without performing a review of the survey data used in establishing the compensation. They are told that the consultant’s data should be “based on reliable and unbiased surveys that are representative of the contractor’s relevant market or industry.” They are also told that no one survey is sufficient to determine the market value of pay for all contractor positions and the memo suggests that a primary survey may be selected with secondary surveys used to collaborate the results of the primary survey. If risk is disclosed, auditors are told to perform their own assessment using available survey data within DCAA by going to regional DCAA compensation specialists (08-PPD-035(R). (Editor’s Note. We believe this represents a step away from the traditional practice of allowing contractors to make their own determinations of what is reasonable executive compensation where DCAA primarily validates the controls used to make the determination to now coming close to having contractors use both the same and number of surveys it uses to determine reasonableness of compensation. DCAA survey data is quite expensive to obtain and, in our opinion, often yields less accurate results than other means contractors use.)

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