For our clients who are PennDOT contractors, AASHTO has recently released the National Compensation Matrix, which should remove some of the subjectivity involved with determining reasonable compensation for executives making over $120,000 per year.

There is a lot going on at the federal level which could impact state policies. Two major events: 1) The Board of Contract Appeals continues to support contractor appeals of executive compensation versus those adjustments proposed by the Defense Contract Audit Agency (DCAA), and 2) the Office of Procurement Policy recently issued a memo referencing the Obama administration's recommendation to Congress to scrap the current methodology and establish a cap of $199,700 for executive salaries.  In addition, Senators Boxer and Grassley recently introduced a bill to lower the cap to $400,000 (the President's pay level). Currently, the cap is $763,029 for large government contractors.

Several key points have arisen from federal cases involving executive compensation:

  • Have a written bonus policy that clearly distinguishes bonuses from a dividend or distribution of profits.
  • Make sure that all references to bonus payments exclude any link to 'distribution of profits' or 'profit sharing.'
  • If multiple salary surveys are used, consider weighting the surveys based on how many firms are included in the survey.
  • Don't focus solely on revenue when determining what is reasonable. Executive credentials are also important factors.
  • Develop and maintain job descriptions that justify benchmarking to specific job descriptions.
  • Show that positions are responsible for total company revenue.
  • Historically, DCAA has determined 10 percent to be within the 'range of reasonableness' for executive compensation issues. Actuaries argue that most computations resulting in a 95 confidence level would result in a much higher range of reasonableness factor.
  • If being audited and executive compensation will be an issue, address it early so you have time to respond to the auditor's findings before they are included in the report.

PA Workers' Compensation Classifications Proposed Changes

The Pennsylvania Compensation Rating Bureau (PCRB) Filing No. 246 proposes to change Code 955 (Engineering/Consulting Firm) to become an "All Employees Including Office" classification. This means that all employees in these firms would be under one classification and employers would no longer be able to use the rates for salespeople or clerical office employees, which are substantially lower. The current rate for engineers is $0.47 per $100 of payroll.  The proposed rate is $0.25 per $100 of payroll.

In addition, the proposal creates a new class code of 905 for architectural, supervisory, consulting, and interior design firms whose rates are not yet determined. New rates are scheduled to be set by the PCRB by October 2012.

Comments, favorable or unfavorable, are due to the Pennsylvania Insurance Department by July 18, 2012 and should be e-mailed to Email.

Be sure to stay in contact with your insurance broker so they can properly advise you on these changes and the potential impact to your workers' compensation insurance.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.