Determining the Reasonableness of EXECUTIVE COMPENSATION

Ohio Department of Transportation Compensation Matrix - Executive Compensation

DETERMINING THE REASONABLENESS OF EXECUTIVE COMPENSATION

A/E consultants are responsible for establishing the reasonableness of executive compensation costs. In doing so, each consultant should prepare a cost analysis compliant with the criteria established in FAR 31.205-6, Techplan Corporation,1 and Information Systems and Networks Corporation.2 These criteria are fully discussed in the Chapter 7 of the AASHTO Uniform Audit & Accounting Guide, 2010 Edition (see Chapter 7, Sections 7.5.C and 7.6). Consultants must disallow costs in excess of the amount deemed reasonable. The consultant must submit the compensation analysis to ODOT for review and approval.

In cases where a consultant does not perform an acceptable compensation analysis, the Ohio Department of Transportation (ODOT) will use the results of its own study as a baseline for determining the reasonableness of claimed compensation costs. The results of this study are compiled in the following Compensation Matrix, which was developed based on data from the following surveys:  ERI Assessor Series (software program). Economic Research Institute.  2010 PSMJ A/E Management Salary Survey (26th Edition). PSMJ Resources, Inc.  2010 Dietrich Engineering Executive Compensation Survey. D. Dietrich Associates, Inc.

OHIO DEPARTMENT OF TRANSPORTATION COMPENSATION MATRIX (OCM) A/E Revenues Bracket 1 Bracket 2 Bracket 3 Bracket 4 Bracket 5 Bracket 6 Bracket 7 $121,214 to $2,424,281 to $6,060,701 to $12,121,401 to $30,303,501 to $60,607,001 to $121,214,001 to Position $2,424,280 $6,060,700 $12,121,400 $30,303,500 $60,607,000 $121,214,000 $242,428,000 Chief Executive Officer $153,051 $220,413 $241,046 $335,784 $402,654 $457,001 $684,797 Executive Vice President $124,705 $179,410 $207,246 $263,702 $273,476 $316,680 $430,888 Senior Vice President $169,928 $180,992 $225,730 $249,537 $231,293 $286,474 $339,657 Other Principals $145,801 $153,583 $175,666 $178,584 $187,734 $214,518 $241,801 Director of Finance $97,231 $126,087 $137,313 $170,217 $231,247 $263,423 $352,265 Controller $87,081 $114,462 $105,987 $118,553 $140,769 $146,510 $187,668 Business Manager $92,367 $102,321 $109,143 $102,399 $125,519 $131,865 $137,206 Director of Administration $92,367 $102,321 $93,033 $116,706 $163,965 $131,865 $181,337 Director of Operations $142,977 $131,911 $176,686 $178,516 $188,256 $221,304 $267,542 Director of Business Development $91,724 $136,132 $159,238 $192,177 $264,013 $272,590 $279,039 Director of Human Resources $99,149 $95,214 $100,638 $110,409 $144,578 $183,304 $197,541 Director of IT Operations $94,492 $93,472 $106,744 $113,876 $141,487 $155,242 $189,914 Branch Office Manager $51,710 $65,688 $91,132 $96,566 $122,840 $174,191 $132,933 Department Head $147,136 $168,211 $176,363 $190,608 $231,081 $236,740 $258,946 Senior Project Manager $135,641 $148,991 $158,122 $171,512 $197,761 $215,421 $230,329

- OCM amounts are "adjusted" amounts derived from the ERI, PSMJ, and Dietrich surveys. - OCM amounts include adjustments for a 10-percent range of reasonableness premium. - OCM amounts include retirement contributions. - Geographic differentials do not apply to the Year-2010 data.

1 Techplan Corporation, ASBCA Nos. 41470, 45387, and 45388, 1996 ASBCA LEXIS 141. Techplan is the seminal case that established a methodology for applying the reasonableness provisions of FAR 31.205-6 to compensation issues. 2 Information Systems and Networks Corporation, ASBCA No. 47849, 1997 WL 381263 (A.S.B.C.A.), 97-2 BCA P 29132.

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Note: For engineering consultants with revenues that exceed Bracket 7 by 100 percent or more, a 20- percent premium may be applied to the Bracket 7 compensation amount. As noted by the ASBCA in the Techplan Corporation case, “every time revenues double there is a 20 percent increase in the Chief Executive Officer’s compensation.” For purposes of determining premium values above Bracket 7, this 20 percent may be applied to all positions, if applicable–not only to the CEO’s compensation. However, in all cases, the maximum permitted for any position may not exceed the BCA in effect for that year (see, for example, the Bracket 7 CEO’s compensation above). No premium is permitted unless the revenue excess is at least 100 percent.

Other Important Considerations: . The Matrix is based on the national wage market (no geographic differentials applied for specific localities). It may not be appropriate to apply locality adjustments based on State Labor Indices to the Matrix because the OCM amounts are composite figures that include salary, bonus, and retirement contributions. For example, assuming a State with a Labor Index of 1.02 (2-percent above national average), the application of a 2-percent premium to the OCM amounts most likely would result in unrealistically high thresholds because the premium would be applied to all components of compensation—not just salary. Accordingly, ODOT will not permit the use of locality adjustments for any submissions received from A/E Consultants. . The OCM amounts must not be construed as an entitlement, or guaranteed amount of cost recovery; instead, the OCM amounts are merely presented as general benchmarks for determining reasonableness. Each company’s specific circumstances must be considered when determining appropriate compensation adjustments. For example, a company might pay its CEO/owner total compensation that falls below the applicable OCM amounts shown above; however, if any portion of this compensation is attributable to unallowable activities (e.g., lobbying or reorganization), or the CEO/owner receives bonuses based solely on his or her ownership interest in the company (a distribution of profits), then appropriate disallowances must be made. . The OCM amounts apply to total Senior Executive compensation—not just the portion of compensation that is included in the indirect cost pool. . The Matrix is a composite of survey results from three nationally-published sources. The Matrix was compiled to meet the procedures set forth by the Armed Services Board of Contract Appeals in the Techplan case and Section 7.5.C of the AASHTO Uniform Audit and Accounting Guide (Guide). However, the Matrix must not be used as a self-standing survey, as it does not exhibit the required characteristics of a survey.3 Accordingly, A/E Consultants that perform their own analyses of executive compensation must not use the ODOT Matrix as one of the survey sources as described in Section 7.5.C of the Guide.

3 Independent surveys use a data collection instrument (survey questionnaire) that is completed by participants, and the data obtained from these questionnaires are compiled and analyzed using common statistical procedures. Additionally, as noted in Section 7.5.C (Step 3) of the AASHTO Guide: “Nationally published surveys typically identify the mean, median or percentile amounts of salary, bonus and other elements of compensation by revenue ranges, number of firm employees, or discipline. Geographical regions, position title, job descriptions, and additional data analysis typically are standard topics.”

Position Descriptions: The following position descriptions, as defined by the ERI and PSMJ surveys, should be used to find appropriate matches to the Matrix amounts—

1. Chief Executive Officer (CEO). According to PSMJ, “the CEO is responsible for day-to-day operations and business strategies carried out by the firm. Comparable titles include that of president, chief operating officer, and managing partner.” When salaries for several executives/owners are collected, the PSMJ survey reports the CEO’s salary as the highest paid principal’s salary. ERI identifies the CEO as being responsible for the profitability of the entire organization. The CEO also is the top ranking executive, and, in most cases, is the highest paid person in the company. The CEO may preside over the board of directors. 2. Executive Vice President (EVP). According to PSMJ, “the executive vice president (EVP) assists the CEO with overall firm responsibilities. Unlike administration or operations directors, this executive typically has authority over all business functions of a firm rather than over only a limited, defined area.” ERI recognizes that the title at this level varies among organizations; other titles may include Group Vice President or Senior Vice President. Small organizations frequently do not have an EVP. ERI states, “[t]his position is distinguished in that it is responsible for a broad range of activities or functions in the organization.” 3. Senior Vice President (SVP). PSMJ describes this position as “responsible for a segment of a firm’s practice, such as a design discipline, business unit, geographic region, or project type. The SVP usually reports directly to the CEO or the executive vice president. Usually, firms with greater than 50 total staff will have more than one senior vice president. The SVP has more authority than most firms’ principals, and may supervise various principals who report to the specific senior vice president.” Some firms use the Senior Vice President title as an alternative to the Executive Vice President position. 4. Other Principals. According to PSMJ, “other principals usually have some ownership interest in the firm and focus on project delivery. Typically[,] these individuals spend significant time working with clients and charging to projects. Other than top management or business development management, these principals spend more time in marketing and sales than other managers. Many firms have principals with no added functional titles. This indicates that design firms continue to focus certain senior individuals (i.e., principals) on project delivery rather than dividing responsibility for project delivery between their other functional managers.” Some firms give all principals a Vice President title. 5. Director of Finance. According to PSMJ, “the director of finance has full responsibility for the firm’s financial operations. The ability to commit the firm’s resources or to bind the firm to financial commitments is what differentiates this title from other financial positions. This title is generally given to individuals who have a substantial authority to manage all of the firm’s business assets.” Director of Finance is the highest-ranking management position with no project or technical design responsibilities. Alternative titles include Vice President of Finance and Chief Financial Officer.

Position Descriptions (continued): 6. Controller. PSMJ describes the Controller as having “primary responsibility for maintaining the firm’s financial records. In larger firms, where accounting is done at the business unit, office, or divisional level, there may be a controller for each accounting group. This position differs from director of finance in that the controller usually does not have full authority over the firm’s financial assets. The difference between a controller and a business manager is that controllers typically deal only with financial matters whereas business managers control both financial and other business/administrative activities.” The titles Controller, Business Manager, and Director of Administration have many similarities and overlapping duties, depending on the size and complexity of the organization. PSMJ notes, “[w]hile the title of business manager is more common in smaller firms, as size increases the title of controller becomes more common than business manager.” The compensation is somewhat similar for these positions. It will be necessary to review the duties carefully to determine the correct match. 7. Business Manager. According to PSMJ, “the business manager is responsible for managing the overall administrative aspects of a firm, including accounting, human resources, and general office management. Typically, this is the first non-technical (other than clerical) person hired by a small design firm. The position exists[,] but is not as common[,] in larger firms. As firms grow they tend to hire individual human resources and office managers. In addition, they change the title for the individuals with financial responsibility to either controller or director of finance.” The titles Controller, Business Manager, and Director of Administration have many similarities and overlapping duties, depending on the size and complexity of the organization. The compensation is somewhat similar for these positions. It will be necessary to review the duties carefully to determine the correct match. 8. Director of Administration. According to PSMJ, “the director of administration has management responsibility for all support areas of a firm’s operations except technical and project production. This includes responsibility for finance, human resources, marketing, and general administration. Alternative titles include vice president of administration or general manager. Generally, the person reports directly to the CEO, and managers of specific administrative functions report to this individual. This position is not common in most design firms. Fewer than 20% of firms report having a director of administration. As such, the analysis for this position is based on a small sample. It is most common in mid-sized firms.” The titles Controller, Business Manager, and Director of Administration have many similarities and overlapping duties, depending on the size and complexity of the organization. 9. Director of Operations (a.k.a. Operations Director). According to PSMJ, “the director of operations has responsibility and authority to deliver completed projects to the firm’s clients. Normally, those directly in charge of projects (project managers, department heads, or branch office managers) report to this individual. Typical responsibilities include allocation of the production staff, resolving scheduling conflicts, and efficient utilization of the design staff. In this case, the individual’s management responsibility is limited to local, regional, or client-service type organizations (e.g., office, environmental business, northeast region, etc.).” ERI describes the Operations Director as having responsibility for a variety of functional departments. This individual typically assists in the development of business policies and the attainment of operating goals, and by ensuring that all managers are working together. 10. Director of Business Development. According to PSMJ, “the director of business development implements the firm’s marketing and sales policies. This position is distinguished from other business development positions by the degree of responsibility for planning and managing the overall marketing and sales functions.” ERI further indicates that the Director of Business Development “plans and develops objectives, policies, and programs for marketing and sales activities of the organization; reports to the CEO.” Alternate titles for this position include Chief Marketing and Sales Officer, Chief Sales and Marketing Officer, and Vice President of Marketing and Sales.

Position Descriptions (continued): 11. Director of Human Resources. According to PSMJ, “the director of human resources is responsible for a firm’s personnel management functions, including hiring, employee benefits, compensation programs, and record keeping. Alternative titles include director of personnel and personnel manager. Human resources management positions typically carry a large degree of authority, including responsibility for fringe benefit development and the firm’s human resource policies. The authority to implement these types of policies constitutes a management-level position.” ERI further advises that the Director of Human Resources “[d]irects activities relating to personnel rules and regulations, staffing, employee education and training, management development, labor relations, affirmative action, workers compensation administration, benefits administration, and salary administration.” 12. Director of Computer Operations (Information Technology). PSMJ describes this position as follows: “. . . responsible for a firm’s computer assets, including hardware, software, and networks. Alternative titles include data processing manager, manager of automated services, computer manager, manager of information systems, and chief information officer.” ERI also lists the following key duties: “consults with management to determine information requirements of management, scientists, or engineers, determine[s] boundaries and priorities of new projects, and discuss[es] system capacity and equipment acquisitions.” In small companies, the Director of IT may comprise the entire IT department. In larger companies, the Director of IT generally will supervise lower-level staff members. In recognizing that IT requirements and salaries of IT professionals vary dramatically based on a consultant’s size and complexity, data for multiple titles (Information Technology Generalist, Information Technology Supervisor, Information Technology Director, Director of Computer Operations, and MIS Vice President) were used to compile composite cost data for this position. 13. Branch Office Manager. The Branch Office Manager generally has on-site responsibility for day- to-day operations of a firm’s office that is separate from the main office. Some firms use this title for a group manager with a particular project specialty such as airports, bridges, or highways. Alternative titles include Profit Center Manager and Division Manager. Typical responsibilities include marketing, sales, human resource management, and project execution at a local branch office of a firm. Typically, the local management responsibilities are carried out in support of, and under the overall direction of, the central office. 14. Department Head. As defined by PSMJ, “the department head has management responsibility for a specific functional discipline (e.g., electrical, civil, environmental, etc.) within an office. The title also may describe the manager of a group responsible for a separate phase of project work (e.g., programming, detailed design, etc.). Alternative titles include group leader and group manager.” Department Heads may be responsible for a specific discipline such as engineering or survey, or a specific client group, such as government or commercial. There may be some overlap between the titles Department Head and Branch Manager. Typical responsibilities for a Department Head include staff management, project scheduling, and oversight of the technical quality of the design discipline. 15. Senior Project Manager. According to PSMJ, “the senior project manager has full responsibility and authority to execute a project, both within the firm and in its relationship with the client. In addition to completing project tasks, this individual typically participates in marketing the project, setting fees, and negotiating contracts (including additional services).”

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