10.5.13. Annex: Cost Interpretation Bulletin - Number 13 Executive Compensation
Paragraph 04 (2) (f) of Contract Cost Principles 1031-2 states that indirect costs may include: "general and administration expenses: including remuneration of executive and corporate officers…". However, section 07 (1) identifies "unreasonable compensation for officers and employees" as a non-applicable cost. There are many different considerations that may affect the amount a particular individual may be receiving.
This cost interpretation provides guidelines on the determination and allowability of executive compensation expenses that are included in a contractor's overhead expenditures.
Interpretation
- Items included in a total compensation plan for any executive, not necessarily all allowable costs, usually consist of four basis elements, these are:
- Salary: reflects the extent of experience and sustained level of performance for a job, or position.
- Benefits: deals with the provision of time off with pay, employee services, health care services, allowable insurance protection and retirement incentives.
- Performance Incentives: rewards the extent of accomplishment agreement targets.
- Perquisites: benefits which are designed only to apply to executives, such as housing loans; these are in addition to benefits offered to other employees.
- Guidelines for considering what is reasonable executive compensation are:
- compensation paid to executives in similar positions, compared to related executive pay scales surveys;
- the executive's previous experience, experience in other positions within the company and similar appointments in other companies;
- comparison of the compensation paid for the nature and scope of the work, or service, as defined in the contract of service and/or the position description;
- the size and complexity and the corporate management structure;
- the company's general salary policy should be reviewed to ascertain the compensation is uniformly paid, according to set criteria;
- in the case of smaller contractors with a limited number of officers, the amount of compensation paid to executives in the previous year should be reviewed, as a substantial increase over the prior year tends to indicate compensation may be excessive, further investigation should be made to determine whether the executives' salaries are for services rendered, rather than a re-distribution of the business's profits;
- compensation paid to executives through related party transactions.