New executive pay rules go into effect.

• Author: Stafford, John G.
• Position: ETHICSCORNER

The comment period recently ended for an interim rule, "Reporting Executive Compensation and First-Tier Subcontract Awards" (FAR Case 2008-039), which implements the Federal Funding Accountability and Transparency Act (Pub. L. 109 282 as amended).

This rule subjects virtually all government contractors, big and small, to substantial reporting requirements. In fact, because of the carve out for firms now making SEC filings, this rule will hit small or privately held companies much harder than larger publicly held companies.

The rule applies to all prime contractors and first-tier subcontractors that gross $25 million or more in annual revenues from federal contracts, subcontracts, grants, and other covered programs for which federal contracts, subcontracts, grants and other covered programs make up over 80 percent of annual gross revenue as well as those whose executive compensation information is not already available via certain SEC or IRS filings.

This rule is now in effect and will soon become final, so contractors must understand how it applies to them.

The rule requires a new clause, 52.204-10, in all contracts of $25,000 or more, except classified contracts and contracts with individuals. No exception is made for contracts for commercial items or commercial-off-the-shelf items. The rule also requires contractors to report the names and total compensation of their five highest compensated executives and to disclose information related to first-tier subcontracts of $25,000 or more.

Finally, the rule puts the onus on prime contractors to report the names and total compensation of the five highest compensated executives of their first-tier subcontractors. The rule requires information on first-tier subcontractors, and prime contractors must notify their first-tier subcontractors that required information will be made public. The responsibility to report rests with the prime contractor.

"Compensation" under the rule is defined quite broadly to include an individual's salary, bonuses, awards of stock, stock options, and stock appreciation rights, earnings for services under non-equity incentive plans, changes in pension value, above-market earnings on deferred compensation that is not tax-qualified and "other compensation" such as severance payments and life insurance if the value of all "other compensation" exceeds $10,000.

Information on first-tier subcontracts of $25,000 or more and on subcontractor executive compensation must be...