Reporting Executive Compensation: What If You Don’t Report?

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Government contractors are accustomed a myriad of reporting requirements. One such requirement that has caused much consternation is the FAR’s executive compensation clause which, as of October 1, 2015, applies to all contracts exceeding $30,000, as opposed to the pre-inflationary adjustments threshold of $25,000. The clause requires contractors to report their five most highly-paid executives and list their total compensation for the preceding fiscal year. Most contractors are–not surprisingly, given the nature of the information–very reluctant to disclose such information and our firm has received many questions as to the ramifications of non-compliance.

To begin, the reporting requirement is overlooked by many contractors because it only applies if the contractor receives $25 million or more in annual gross revenues from federal contracts, subcontracts, loans, grants, sub-grants and cooperative agreements. It also applies if that amount equals 80% or more of the contractor’s annual gross revenues. Firms that fall within both of these categories must submit the reports to the government unless the information is available under reports filed under either The Security Exchange Act of 1934 or the Internal Revenue Code of 1986. In other words, the reporting requirements only seem to apply to a small universe of firms.

Nonetheless, even if a contractor itself is exempt, it is responsible to flow down the executive compensation clause to its subcontractors which might be subject to the reporting requirement. The flow down requirement is not necessary, however, if the prime contractor’s gross income in the previous tax year from all sources was less than $300,000. Thus, the risk of non-compliance is always there as most government contractors have more than $300,000 in revenue and teaming partners. Whether or not the flow down requirement applies, the prime contractor is responsible for filing the reports of the subcontractor so the flow down clause is the mechanism through which to enforce compliance by the subcontractor.

Many contractors are still in a state of denial about the existence of the regulation and wonder about the impact of not reporting. The regulations indicate that if a contractor does not comply, a contracting officer (1) can exercise “appropriate contractual remedies,” and (2) note the contractor’s failure to comply in its performance evaluation. Further, the executive compensation information is required in order for a contractor to be registered in the SAM database. If the offeror is not registered in SAM, the contracting officer is supposed to proceed to award to the next otherwise successful registered offeror. Thus, the failure to be properly registered on SAM could actually result in the loss of a contract. We have never seen that happen, however.

It is worth noting that the FAR also provides that while agencies must ensure that contractors comply with the reporting requirements, “[t]he agency is not required to address data for which the agency would not normally have supporting information, such as the compensation information required of contractors and first-tier subcontractors.” FAR 4.1402(a) (emphasis added). This language suggests that while contractors are required to submit executive compensation information, there is no requirement that agencies verify it or ensure that it is complete. Instead, agencies are tasked merely with ensuring that the report has been submitted and that the information already known to the agency, e.g., contract dollar amounts, is accurate.

Thus, the regulations seem to lack the necessary teeth to hold contractors accountable. Given such intrusive requirements into highly proprietary and confidential information about a business and conflicting regulations regarding application and enforcement, it is no wonder that many contractors and procurement agencies don’t know what to do.

About the Author: Tony Franco is a senior partner with PilieroMazza and oversees the Government Contracts and Small Business Programs Groups. He may be reached at afranco@pilieromazza.com.  

 

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