HR Policy Association in conjunction with the Center On Executive Compensation believe the significant changes introduced in The National Defense Authorization Act of 2012 for federal reimbursement of executive compensation costs in federal defense contracts will have a negative impact on the recruitment and retention efforts of federal contractors. Since 1995, defense contractors had been permitted to expense the compensation of “senior executives” pursuant to a regulatory benchmarking limitation. For employees falling outside the definition of “senior executive,” defense contractors have had the ability to expense any compensation amount. Section 803 of The National Defense Authorization Act of 2012 expanded the compensation expense limitation from applying only to “senior executives of the contractor” to “any contractor employee” effectively capping the compensation expense for all employees at the statutory amount that previously applied only to senior executive compensation. This will significantly limit the ability of defense contractors to expense employee compensation as well as hurt the ability of a contractor to recruit and pay for top talent.
The changes give some flexibility to the Secretary of Defense to provide narrowly targeted exceptions for certain scientists and engineers following a contractor’s application and a determination that the exception is necessary. However, the Association and Center question whether the process for obtaining an exception will happen quickly enough to allow crucial positions to be filled. While the pay limitations are a small part of the overall Defense Authorization Act, which authorizes spending for the subsequent fiscal year, the provision provides an indication of how Congress may treat executive compensation issues, especially those involving federal contractors and tax-related issues, going forward.