The Office of Management and Budget has set the maximum “benchmark” compensation allowable for contractor executives in Fiscal Year 2005 at $473,318 for all applicable contracts no matter when awarded.  The benchmark will apply to contract costs incurred after January 1, 2005 and should be used on all applicable contracts and subcontracts for FY 2005 and beyond until revised by OMB.

The new cap represents an 8.5 percent increase over the FY 2004 amount of $432,851.  Contractors can, of course, pay their executives more than $473,318 but the additional compensation will not be allowable under their federal contracts.  Recent DCAA guidance stresses the cap covered compensation includes the total amounts of salary, bonuses, deferred compensation and employer contributions to defined contribution pension plans.  The cap covered compensation does not apply to fringe benefits like health benefits and employer contributions to defined benefit plans where if they are reasonable they are allowed irrespective of the cap.  The cap covers the five senior managers of a company as well as subsidiary business segments directly reporting to the corporate headquarters.  The benchmark compensation amount reflects the median (or 50 percentile) amount of compensation for senior executives of all surveyed corporations for the most recent year data is available.  Since the surveyed companies include the top five highest paid executives of public-traded companies with annual sales over $50 million be aware that lower caps are likely to apply to smaller companies (Fed. Reg. 23888).

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