1. What Is and Isn’t “Reasonable”
Compensation: Successful Approaches for
Using Survey Data to Support Your Position
American Conference Institute’s 3rd
DCAA Audit & Compliance Boot Camp

2. 2
Introduction
Nancy Thorn Turner
Director, Ethics and Compliance
Orbital Sciences Corporation
Amber Duncan
Manager, Compensation Consulting
CBIZ Human Capital Services
Certified Compensation Professional (CCP)

3. 3
Overview
• DCAA Compensation Methodology
• How to Support Reasonable Compensation
• Case Studies - Orbital and CBIZ Experience
• Conclusions

4. DCAA Compensation
Methodology

5. 5
DCAA Methodology Based On:
• Federal Acquisition Regulation (FAR)
• DCAA Contract Audit Manual (CAM)
• Case Law – Armed Services Board of Contract Appeals
(ASBCA)

6. 6
DCAA Compensation Methodology
• Reasonable executive compensation ranks third in terms
of questioned costs

7. 7
Federal Acquisition Regulation (FAR)
• FAR 31.205-6, Compensation for Personal Services
– Must be for work performed in current year; no retroactive
adjustments
– Total compensation must be reasonable
– Consistent with established compensation plan or practices
– Otherwise allowable
• Amended June 26, 2013 – Cap now applies to ALL
employees, not just the top 5
– Costs incurred after January 1, 2012
– On contracts awarded after December 31, 2011

8. 8
DCAA Methodology
• Factors for determining reasonableness per FAR
31.205-6(b)(2) may include, but are not limited to
conformity with compensation practices of other firms—
 (i) Of the same size;
? (ii) In the same industry;
X (iii) In the same geographic area; and
? (iv) Engaged in similar non-Government work
under comparable circumstances.

9. 9
DCAA Methodology – Case Law
• ASBCA No. 47849 – Information Systems & Network
Corporation
– Properly dated compensation data should be used
– No premium for owners performing multiple functions
– Company financial performance should be considered in
determining reasonable comp
– Compensation offsets should be considered
• ASBCA No. 41470, 45387, 45388 – Techplan Corporation
– No discount for owner-CEOs performing multiple functions
– Survey data should be for similarly sized companies
– Multiple survey sources should be used
– 10% ―range of reasonableness‖

10. 10
DCAA Methodology – Case Law Recent
Developments
• ASBCA Nos. 56105 and 56322 – J.F. Taylor, Inc.
– ASBCA Rejected DCAA's Methodology for determining
reasonableness of executive compensation, citing that the DCAA
methodology was ――fatally flawed statistically and therefore
unreasonable.‖ Fatal flaws included:
• Ignoring dispersion of data and instead relying upon 10% range of
reasonableness
• Ignoring differences in survey response sizes
• Not initially considering financial performance
• Not considering any other drivers of compensation (security
clearances, customer satisfaction, etc.)
• Varying industry classification over 4-years in question
• Varying matches over same studies

11. 11
DCAA Methodology – Case Law Recent
Developments
– Fatal flaws included (continued):
• Relying upon different surveys each year
• Using median and average interchangeably from different surveys,
• Considered revenue responsibility of each person rather than
overall company
– Accepted opposing expert witness compensation methodology:
• 95% confidence range
• Weighting of surveys based upon number of respondents

12. 12
DCAA Methodology – Case Law Recent
Developments
• ASBCA No. 56624, 56751, and 56752 – Metron, Inc.
– Survey Data: ASBCA allowed Metron to rely upon one Radford Survey
rather than the DCAA’s multiple surveys that it found ―were not
sufficiently comprehensive, reliable, relevant to Metron's industry,
and/or the job matches were not sufficiently similar and representative
to warrant material reduction of the results obtained from use of the
Radford Survey data alone―
– Manipulation of Survey Data: ASBCA deemed the DCAA’s
manipulation of Radford survey data based upon prevalence of annual
incentives to be flawed
– Market Comparison Point: DCAA selected 66th and 41st percentile as
market comparison points on the basis of firm’s revenue compared to
peers only. ASBCA found methodology to calculate percentiles flawed.
Board also rejected the concept of assigning contractors a point on the
spectrum based on revenues and found Metron could pay above
average based upon required executive qualifications.

13. 13
DCAA Methodology – Case Law Recent
Developments
– Peer Group: ASBCA found peer group selected by DCAA to allow
―misleading comparisons with much larger companies with marke4ly
differing organizational and financial structures.‖
– Comparable Positions: DCAA matched Senior Engineers to mid-level
managers rather than Vice President level. Based upon review of
duties, ASBCA found to be a Vice-President or Top-level postion.
– Compensation Plans: Metron Case affirmed fact that compensation
plans and decisions should be documented in advance.

14. 14
DCAA Mid-Atlantic Region Compensation
Review Process*
• Evaluate basis of contractor compensation
• Determine the position to be evaluated
• Identify appropriate surveys & positions
• Update surveys to appropriate date
• Identify and determine appropriate survey percentile
• Apply 10% Range of Reasonableness
• Adjust results for offsets as necessary
• Compare claimed comp to average of survey results
• Detailed review of contractor rebuttal
* DCAA Policy and Plans Directorate, April 2013

15. How to Support Reasonable
Compensation

16. 16
How to Support Reasonableness
Be prepared to engage Contracting Officer and DCAA
• Are surveys used by auditors the right ones?
– Get the details, which industry, which size, geographic location
– Do you use or have access to another survey more appropriate?
• Are there unique aspects to the position within your company or
corporate responsibilities?
• Are surveys being used/interpreted in a statistically valid manner?
• Provide evidence of financial and non-financial performance and
accomplishments of company and employees being evaluated
• Compensation plan

17. 17
How to Support Reasonableness
• Job titles and descriptions
– Ensure the job title reflects the level of duties being performed
– Note any advances degrees, special skills/credentials, clearance
requirements, etc.
– Note if executive has any corporate-wide responsibilities
• Write a logical rebuttal if Executive Compensation Review Team
identifies ―unreasonable‖ compensation

18. Case Studies

19. 19
DCAA Rebuttal Success - Example 1

20. 20
Example 1 – Overview
• DCAA reviewed the compensation of the VP and Chief Scientist of a
division of a satellite manufacturer and found $89,500 of the total
cash compensation paid to the individual was unreasonable and
therefore unallowable.
• Matched to the 50th percentile in two surveys.
• Company was measured against the High Tech Manufacturing
Group, Manufacturing Durable Goods Group, Manufacturing All or
All Organizations in one survey (Mercer) and the Aerospace, Group,
High Technology Group or Durable Goods Manufacturing Group in
the other survey (Watson Wyatt). Which group was used depended
on the availability of data.
• It was not possible to discern which group was used for which
position.

21. 21
Example 1 – DCAA Interaction
• Company argued the position was unique with responsibility for
large engineering function.
• Compared the position to VP of Chief Engineers position in a
different survey which focuses solely on High Tech Companies.
• Company argued that based on the unique position, financial and
technical performance of the division and company, and the
comparable industry, the comparison should be to the 75th
percentile.
• DCAA reviewed the rebuttal and found all compensation to be
allowable.

22. 22
Example 1 – Lessons Learned
• 75th percentile compensation can be supported through
unique position, financial and technical performance of
the division and company
• Market matches and survey selection are up for
discussion

23. 23
DCAA Rebuttal Success - Example 2

24. 24
Example 2 – Overview
• The DCAA reviewed compensation at a small closely
held high-technology company and found maximum
allowable total cash compensation to be $263,151.
• Actual total cash compensation was $404,400.
• After reviewing DCAA results, CBIZ recognized that the
DCAA had matched the company’s CEO to a published
survey CEO and CTO, weighted 39% and 61%,
respectively, unfairly discounting the position.
• In addition, the DCAA compared this high-performing
company to a 50th percentile range of reasonableness.

25. 25
Example 2 – DCAA Interaction
• CBIZ found maximum reasonable total compensation (including total
cash compensation, LTI, benefits and perquisites) to be $804,758,
for a difference of $541,607 from the DCAA allowable total cash
comp.
• The DCAA agreed to change market match to CEO and use 75th
percentile data as the market comparison point, but did not allow LTI
or geographic adjustment of the data. The DCAA also did not
consider perquisites or benefits.
• With the DCAA revisions, all actual compensation was found to be
allowable, saving the company nearly $150,000.
• CBIZ continues to provide client with pre-emptive compensation
studies.

26. 26
Example 2 – Lessons Learned
• Pay close attention to how you title your executives.
• If performance can be proved to be at or above the 75th
percentile of an appropriate peer group, the DCAA may
allow a 75th percentile plus 10% range of
reasonableness.

27. 27
DCAA Rebuttal Success – Example 3

28. 28
Example 3 - Overview
• DCAA found reasonable total cash compensation to be
$680,551 for the 4-executive management team of this
high technology California company.
• Actual compensation was $968,945, for a total
questionable compensation expense of nearly $300,000.
• The executives were paid nearly identically (i.e. little
differentiation of pay by level).
• The DCAA used its standard median plus 10% range of
reasonableness and matched the positions to market
data based on title.

29. 29
Example 3 – DCAA Interaction
• CBIZ demonstrated performance above the 75th percentile of peers
in key financial indicators listed in the CAM (revenue growth, net
income, return on shareholder’s equity, return on assets, return on
sales, earnings per share and return on capital).
• CBIZ argued the company’s positions titled CTO and Chief Business
Development Officer should be matched to a published survey COO
and Top Sales position, respectively.
• CBIZ determined maximum reasonable total compensation to be
$1,680,904, nearly $1 million above the DCAA total cash
compensation figure.
• The DCAA changed the matches and agreed to use 75th percentile
data, bringing DCAA total reasonable compensation to
approximately $930,000 and saving the company $250,000.

30. 30
Example 3 – Lessons Learned
• Titles are key.
• Determine DCAA-acceptable financial performance
measures and peers in advance.
• If performance can be proved to be at or above the 75th
percentile of an appropriate peer group, the DCAA may
allow a 75th percentile plus 10% range of
reasonableness.
• While the DCAA allows offsets of compensation
components (i.e. benefits), high pay to one executive
and low to another cannot offset each other. Each
executive’s pay is reviewed individually.

31. 31
DCAA Rebuttal Success - Example 4

32. 32
Example 4 - Overview
• DCAA found reasonable compensation to be $466,402
for the company CEO and COO at this small high tech
government contractor.
• Actual total cash was $523,592.
• The DCAA used its standard median plus 10% range of
reasonableness.

33. 33
Example 4 – DCAA Interaction
• Before hiring CBIZ, client tried to handle issue
themselves.
• DCAA’s questioned compensation increased based on
client arguments.
• CBIZ was able to prove performance above the 90th
percentile.
• CBIZ found maximum reasonable compensation (75th
percentile) to be $1,188,053.
• The DCAA agreed to revise its results by using 75th
percentile data saving the company $60,000.

34. 34
Example 4 – Lessons Learned
• Determine DCAA-acceptable financial performance
measures and peers in advance.
• Always be courteous to our friends at the DCAA and
know rules before challenging.

35. 35
Conclusions
• Compensation is a major focus of DCAA Audits
• Defining reasonable compensation is a multi-faceted
issue
• No way around caps
• Proactively document reasonable compensation and
allocations to contracts
– Purchase significant survey data; or
– Use outside compensation expertise

36. Questions?
Amber Duncan, CCP Nancy Thorn Turner
Manager, Compensation Director, Ethics and Compliance
CBIZ Human Capital Services Orbital Sciences Corporation
800-844-4510, ext. 295 or 703-404-7860
alduncan@cbiz.com turner.nancy@orbital.com
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