Federal Contracts Report™ Reproduced with permission from Federal Contracts Report, 999 FCR 536, 04/30/2013. Copyright ஽ 2013 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com DOD Myths and Misunderstandings Related to Contractor Executive Compensation Caps 1 BY KATHY C. WEINBERG AND DAMIEN C. SPECHT make any sense that taxpayers are paying some con- tractors twice as much as we pay the Commander-In- iven slow economic growth and the impacts of se- Chief, and three to four times as much as the Secretary questration, it is not surprising that government of Defense.’’2 In fact, there is good reason that this is G contracts spending has recently come under fire. the case; comparing the president’s salary to executive In addition to programmatic cuts, specific costs, such as compensation is like comparing apples and oranges, executive compensation for government contractors and Senator Manchin’s comparison is packed with have been targeted. Although the government already myths. caps what it will compensate contractors for executive Myth: The president’s salary reflects the market value of compensation under cost-type contracts at a market- an equivalent CEO job. based amount of $763,029, critics have advocated limit- ing executive compensation to the president’s or vice This is not and has never been the case. From the be- president’s salary—reducing the cap by as much as 75 ginning, the historical record is clear that the presi- percent. In response to these proposed reforms, the dent’s salary rests on the desire to ensure the office re- comptroller general was ordered under the 2013 Na- mains independent, not to take on the impossible task tional Defense Authorization Act to study the issue and of finding a market-based salary for the president of a issue a report to Congress to later than May 2013. Un- country. Alexander Hamilton, one of the most passion- fortunately, the debate around this important issue in- ate advocates for the creation of a presidential salary, volves a number of myths and misunderstandings. explained that a salary was necessary to prevent ‘‘the Claim: The president’s salary is a good measure of execu- intimidation or seduction of the executive by the ter- 3 tive compensation. rors, or allurements, of [] pecuniary arrangements.’’ Senator Joe Manchin of West Virginia, a supporter of This same rationale provided the basis for increasing lowering the compensation cap, recently stated: ‘‘[t]o the president’s salary in 1871 when Congress noted that the people of West Virginia— and to me—it doesn’t the president was precluded from working in other 2 1 The authors would like to thank law clerk Rachael Plym- Senator Joe Manchin, Manchin Applauds Growing Sup- ale for her assistance in preparing this article. port to End Military Contractors’ Exorbitant Salaries and Stand Up for a Strong Defense (Oct. 18, 2012), availableat http://www.manchin.senate.gov/public/index.cfm/2012/10/ Kathy C. Weinberg is of counsel and Damien manchin-applauds-growing-support-to-end-military- contractors-exorbitant-salaries-and-stand-up-for-a-strong- C. Specht is an associate in Jenner & Block’s defense (last visited Apr. 22, 2013). 3 government contracts practice. JAMES F. VIVIAN,THE PRESIDENT’S SALARY:ASTUDY IN CONSTITU- TIONAL DECLENSION, 1789-1990, 4 (1993). COPYRIGHT ஽ 2013 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0014-9063 2 posts after leaving office based on ‘‘custom and public It is almost impossible to monetize all the non- sentiment’’ and should have a sufficient salary to be monetary benefits provided to the president. The presi- free ‘‘from all active, or at least all money-making, pur- dent enjoys the prestige of being the leader of the free suits.’’4 Conversely, contractor executive salaries are world. The president also receives free residence in the market-driven. Far from providing gratuitous compen- White House, along with use of its staff and facilities, sation to their executives, contractors work within the including free medical care, free recreation opportuni- bounds of a competitive marketplace in attracting and ties, and free housekeeping, and security services. The retaining top talent. White House has 132 rooms and 35 bathrooms and an If the president’s salary were market-based, it would annual flower budget exceeding $200,000. The staff in- be astronomical. To illustrate this point, envision the cludes an executive chef, a pastry chef, a physician to United States as the largest corporation in the country. the president, a social secretary, a chief of protocol, a Revenues for Exxon, currently the country’s largest cor- chief calligrapher, and even a chief floral designer. And poration, are $452.9 billion a year, but the USA’s $2.24 the president has his own zip code (20500-0001)! It is not surprising that the Reagan family equated life in the trillion annual revenue would dwarf Exxon’s. Managing White House to staying in an ‘‘eight-star hotel.’’7 The over 540 times the revenue of his counterpart at Exxon, president also has use of a secondary residence or guest the ‘‘CEO’’ of this United States corporation arguably accommodations at the Blair House next to the White should be compensated accordingly, under the House, which spans over 70,000 sq. feet and has 119 ‘‘market-based salary’’ principle. In 2012, the CEO of rooms, including 20 bedrooms, 35 bathrooms, and a Exxon had a base salary of $2,387,000 with total com- hair salon. The president is a short helicopter ride from pensation coming in at $34,920,506. If the president his free vacation home at Camp David. were paid on the same scale as Exxon’s CEO, he would Of course, the president also enjoys transportation receive a base salary of approximately $12,900,000 and perks, including free use of the presidential state car, total compensation of approximately $188,870,000. This Air Force One, and Marine One. Better yet, the Motion comparison, far from being scientific, simply demon- Picture Association of America will provide any movie strates the absurdity of using the president’s salary as a the president requests, including first-run or soon-to- market measure. be-released movies for viewing in the White House In addition, if a president’s salary were meant to be a movie theatre. This list of benefits would make any ex- market measure, it would increase with inflation. In ecutive jealous. contrast, the president’s salary can be increased only by But the president’s benefits don’t stop when he leaves act of Congress.5 Such increases are rare, having oc- 6 office. Post-presidency benefits include a pension equal curred only 5 times in the past 236 years. Raising the to that of the current administration’s cabinet secretar- president’s salary to market levels could also incentiv- ies (currently about $200,000/year), six months of tran- ize candidates to run for office merely for the financial sition funding, medical insurance, lifetime Secret Ser- gain. Because the president’s salary was not designed to vice protection for former presidents and spouses as be a market measure, it makes little sense to use that well as children up to age 16, office and staff expenses salary as the basis for contractor compensation. for life, including stationary and phone services, frank- Myth: The president’s compensation is $400,000 a year. ing privileges for free postal services, access to the The president’s salary is only the beginning of his presidential townhouse and state funeral benefits. overall compensation package. Even if one agreed with These benefits can add up to incredible amounts of Senator Manchin that executive compensation and money. In 2008, former President Clinton’s allowance presidential pay should be linked, the existing cap is on was $1,162,000 which includes his pension, $96,000 for contractor executives’ total compensation. So it makes staff salaries, $65,000 for staff benefits, $50,000 for little sense to ignore the president’s total compensation travel, $516,000 in rent for office space, $79,000 for tele- package in determining whether changes to the execu- phone services, $15,000 in postage, $65,000 for other tive compensation cap would be appropriate. In mon- services, $14,000 for printing, $26,000 for supplies, and 8 etary benefits alone, the president is paid an annual sal- $35,000 for printing. Of course, none of these benefits ary of $400,000 with unlimited vacation days, along include the millions that former presidents make with a $50,000 annual expense account, $100,000 non- through publishing and public speaking. taxable travel account and $19,000 for entertainment These benefits make it impossible to calculate the expenses—for total monetary compensation of true value of the president’s total compensation pack- $569,000. age and use that measure to cap contractor total com- pensation. Even if that true value could be determined, it would be vastly higher than the current cap on allow- 4 Id.at30. 5 able executive compensation of $763,029, thus failing to U.S. CONST. art. II, § 1, cl. 7 reads: ‘‘The President shall, at provide a useful means of reducing spending under stated Times, receive for his Services, a Compensation, which shall neither be increased nor diminished during the Period for government contracts. which he shall have been elected, and he shall not receive Claim: The government is funding exorbitant contractor within that Period any other Emolument from the United salaries. States, or any of them.’’ Congress must pass legislation to ad- A number of elected officials and other members of just the president’s salary.