The Armed Services Board of Contract Appeals (ASBCA) recently ruled in the Metron, Inc. appeals (56624, 56751, and 56752), as it did in the J.F. Taylor case (previously blogged on), that the DCAA’s contractor executive compensation evaluation methodology is unreasonable.
Metron had a documented executive compensation methodology based on the Radford Survey, and had been consistently utilizing it since November of 1995. Metron’s organizational and work structure is one where the majority of the work performed it at higher levels and those employees, including the top executives, hold advanced degrees and high level security clearances. An internal Metron memorandum “concluded that the Radford Survey best reflected Metron’s market for labor and business.” Metron also conducted internal compensation surveys in 1998 and 2005, concluding the Radford Survey was appropriate.
The ASBCA ruled that Metron met its burden of proving the executive compensation costs for the years in question (2004 and 2005) were reasonable and allowable. Metron substantiated its compensation and ASBCA ruled for Metron, on several factors, including, but not limited to the following:
- Metron used only the Radford Survey as it was the survey which best reflected Metron’s business “in terms of size/revenue (under $50 million), industry (high technology), and geographic location (national).” The DCAA utilized several surveys and averaged them together, which yielded a lower number than only the Radford Survey.
- Metron operated for 20 years with significant growth in revenue and all of the executives in question “met or exceeded financial goals” noted in the Metron compensation plan.
- Metron classifies many of its top executives as Senior Engineers or Senior Managers and compensates them at top executive levels, based on experience, education, etc. The DCAA did not match the actual work performed by these employees, only their titles, notably because of the absence of “Vice President”-like titles and not interviewing the employees to determine their responsibilities, etc. Metron matched the work performed, not simply their title, to the compensation level, and the ASBCA agreed.
- The DCAA tried to extrapolate the results of the Radford Survey data based on what they perceived as shortcomings in the survey compensation calculations. As the DCAA’s analysis was not made based on the underlying Radford Survey data the ASBCA ruled there are “various flaws in the government’s data and methodology.”
The Metron decision, as well as J.F. Taylor, provides some fodder for contractors when discussing executive compensation with the DCAA. The DCAA appears to be using executive compensation as an easy way to disallow a significant amount of cost. In order to reduce the risk of executive compensation disallowance contractors should document compensation plans as well as the consideration of reasonable executive compensation before the auditor arrives. While this case and others have been won it was not without considerable effort and cost on the side of the contractor.
Please contact Brian Bender at 301.222.8273 or firstname.lastname@example.org for questions or assistance with your federal government compliance issues.
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