Impact of Legislative Compensation Caps on DOD Contracts

Pursuant to a congressional request, GAO developed information on the extent to which legislative caps have affected executive compensation allowable under Department of Defense (DOD) contracts.

GAO noted that: (1) the information collected on McDonnell Douglas Corporation and nine other contractors indicates that the compensation cap imposed on DOD contractors for fiscal year (FY) 1995, had no significant effect on limiting executive compensation charged to defense contracts for 1995; (2) for McDonnell Douglas Corporation, which had about $33.7 million in executive compensation in excess of $250,000, only about $313,000, or less than 1 percent, is estimated to be limited by the FY 1995 compensation cap; (3) estimates by the nine other defense contractors of excess compensation costs subject to the FY 1995 compensation cap range from 0.14 to 3 percent; (4) the limited impact of the legislative compensation cap was primarily due to the short period the cap was in effect during 1995 (5-1/2 months) and the small amount of costs associated with new contracts entered into during this period using FY 1995 appropriations; (5) for some of the same reasons, the amount of executive compensation charged to defense contracts in FY 1996 will not be significantly affected, although the amount determined to be unallowable will increase because both the FY 1995 and 1996 limitations were in effect; (6) McDonnell Douglas Corporation estimates that only about 3 percent of 1996 executive compensation in excess of the cap will be subject to the FY 1995 and 1996 compensation caps; and (7) aggregated data on the effect of the 1997 cap was not available at the time of GAO's review.