New Executive Pay Rules Go Into Effect
This rule subjects virtually all government contractors, big and small, to substantial reporting requirements. In fact, because of the carve out for firms now making SEC filings, this rule will hit small or privately held companies much harder than larger publicly held companies.
The rule applies to all prime contractors and first-tier subcontractors that gross $25 million or more in annual revenues from federal contracts, subcontracts, grants, and other covered programs for which federal contracts, subcontracts, grants and other covered programs make up over 80 percent of annual gross revenue as well as those whose executive compensation information is not already available via certain SEC or IRS filings.
This rule is now in effect and will soon become final, so contractors must understand how it applies to them.
The rule requires a new clause, 52.204-10, in all contracts of $25,000 or more, except classified contracts and contracts with individuals. No exception is made for contracts for commercial items or commercial-off-the-shelf items. The rule also requires contractors to report the names and total compensation of their five highest compensated executives and to disclose information related to first-tier subcontracts of $25,000 or more.
Finally, the rule puts the onus on prime contractors to report the names and total compensation of the five highest compensated executives of their first-tier subcontractors. The rule requires information on first-tier subcontractors, and prime contractors must notify their first-tier subcontractors that required information will be made public. The responsibility to report rests with the prime contractor.
“Compensation” under the rule is defined quite broadly to include an individual’s salary, bonuses, awards of stock, stock options, and stock appreciation rights, earnings for services under non-equity incentive plans, changes in pension value, above-market earnings on deferred compensation that is not tax-qualified and “other compensation” such as severance payments and life insurance if the value of all “other compensation” exceeds $10,000.
Information on first-tier subcontracts of $25,000 or more and on subcontractor executive compensation must be reported via the act’s Subaward Reporting System. Information related to prime contractor executive compensation must be reported via the Central Contractor Registration system. As to timing, contractors must report required information by the end of the month during which a contract containing FAR 52.204-10 is awarded, and annually thereafter, and all of this reported information will be made public.
Two exceptions to the first-tier subcontractor reporting requirement bear mention. Any contractor with gross income in the prior tax year below $300,000 need not report subcontractor award information. Also, if the subcontractor’s prior tax year gross income was below $300,000, the prime contractor need not report subcontract awards to that subcontractor.
One nuance is the phase-in of reporting subcontract awards. From Oct. 1 until Feb. 28, the requirement applies if the prime contract award amount is $550,000 or more. Thereafter, the requirement applies if the prime contract award is $25,000 or more.
While these new reporting requirements should only cover contracts containing FAR 52.204-10, Central Contractor Registration recently has begun to require disclosure of executive compensation information as a pro forma matter when a contractor’s annual registration must be renewed, whether that contractor is subject to FAR 52.204-10 or not. If the contractor refuses or otherwise fails to enter the executive compensation information, its registration may not be renewed, leading to the potential suspension of contract payments until the information is entered.
Federal contractors susceptible to this new rule should thus act now to establish systems to identify their top five compensated executives and also to collect the required first-tier subcontract award and subcontractor executive compensation information.
John G. Stafford is a shareholder (email@example.com) and Caitlin E. Stapleton (firstname.lastname@example.org) is an associate with the international law firm of Greenberg Traurig LLP government contracts practice group. The views expressed are solely those of the authors.