The Contractor’s Perspective is up to three entries on the application of FAR 52.204-10, which requires some federal contractors and first-tier subcontractors to report the compensation of their top-five highest paid executives. Even though it has been almost two years since the requirement first appeared in the FAR, the topic still generates a lot of interest and a lot of questions. Here are answers to some of the questions we received in the executive compensation reporting segment of our recent webinar on Transparency in Government Contracting, sponsored by L2 Federal Resources. We hope you find them useful.
Question: Does FAR 52.204-10 apply only to new contracts or does it also apply retroactively to existing contracts?
Answer: Even though the statutory requirement for reporting executive compensation became law in April 2008 when President Bush signed the Government Funding Transparency Act of 2008, the contractual requirement didn’t go into effect until July 8, 2010, when the FAR Councils published FAR 52.204-10 as an “interim rule.” According to the text of the interim rule, FAR 52.204-10 is required in all contracts over $25,000 that are awarded after July 8, 2010. It does not apply to contracts awarded before on or before July 8, 2010.
Question: If the executive reporting requirement is added to the contract through a contract modification, is the contractor penalized for not reporting executive compensation by the end of the month following the month of the initial contract award, as required FAR 52.204-10(c)(2)?
Answer: No. Our view is that a contractor’s obligations are reflected in the contract. The language of FAR 52.204-10(c)(2) cannot reasonably be read to permit a penalty for a lack of disclosure when it was not in the contract at the time the disclosure would have been required. A penalty cannot properly be assessed for failing to adhere to a requirement that “should have been” in the contract.
Question: Is a contractor that meets the applicable thresholds required to report executive compensation awards if FAR 52.204-10 is not incorporated into the contract?
Answer: There may be valid reasons for the FAR clause to be omitted from the contract. Contracts awarded before the effective date of the clause, for example, would not be subject to the reporting requirement. There is no requirement that existing contracts be amended to require executive compensation reporting. Although the government may assert that the Christian Doctrine has the effect of incorporating the clause if it was improperly omitted, the application of the Christian Doctrine to FAR 52.204-10 is not at all certain. Consult an attorney before making a decision on this one.
Question: How do the $25 million/80-percent revenue thresholds in FAR 52.204-10 work? Is a contractor that meets one but not both thresholds required to report executive compensation?
Answer: Executive compensation reporting is required only of contractors and first-tier subcontractors that meet both annual revenue thresholds—(1) $25 million or more in annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements; and (2) 80 percent or more of its annual gross revenues from federal contracts, subcontracts, loans, grants, subgrants, and cooperative agreements. Even when both thresholds are met, reporting is required only if the public does not have access to the information about the compensation of the executives through periodic reports filed under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a), 78o(d)) or section 6104 of the Internal Revenue Code of 1986.
Question: When are the contractor’s revenues calculated for purposes of the thresholds in FAR 52.204-10?
Answer: The contractor’s earnings are reviewed against the revenue thresholds on an annual basis. It is possible that a contractor that is exempt from reporting in the month after contract award because it does not meet the applicable revenue thresholds would be required to report in a later period.
Question: Do sales commissions have to be reported under FAR 52.204-10?
Answer: Yes. Sales commissions earned by one of the contractor’s five most highly compensated executives would have to be reported as part of their “total compensation.” FAR 52.204-10(a) includes a broad definition of total compensation:
“Total compensation” means the cash and noncash dollar value earned by the executive during the Contractor’s preceding fiscal year and includes the following (for more information see 17 CFR 229.402(c)(2)):
(1) Salary and bonus.
(2) Awards of stock, stock options, and stock appreciation rights. Use the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 718, Compensation-Stock Compensation.
(3) Earnings for services under non-equity incentive plans. This does not include group life, health, hospitalization or medical reimbursement plans that do not discriminate in favor of executives, and are available generally to all salaried employees.
(4) Change in pension value. This is the change in present value of defined benefit and actuarial pension plans.
(5) Above-market earnings on deferred compensation which is not tax-qualified.
(6) Other compensation, if the aggregate value of all such other compensation (e.g., severance, termination payments, value of life insurance paid on behalf of the employee, perquisites or property) for the executive exceeds $10,000.
Question: Our company is occasionally awarded contracts with the Department of Energy and the Department Veteran’s Affairs. Does the executive compensation reporting requirement apply to DOE and VA contracts?
Answer: Yes. Although there are exceptions for classified contracts and contracts with individuals, the requirement to report executive compensation and first-tier subcontract awards applies to all federal government solicitations and contracts of $25,000 or more. It is not agency specific. See FAR 4.1403.
More answers to frequently asked questions on executive compensation reporting for federal contractors are available here. Copies of the slides and the audio recording of our webinar on the subject are available from L2 Federal Resources. Thanks!