Defense Contractors Making Double President’s Salary

We're paying a lot of money for defense contractors. It's not clear how much of this is wasteful.

defense-spending

We’re paying a lot of money for defense contractors. It’s not clear how much of this is wasteful.

Hayes Brown, ThinkProgress (“Federal Defense Contractors Paid Almost Double Obama’s Salary“):

new report out from the government’s oversight agency finds that millions of dollars could be saved if federal contractors — particularly at the Pentagon — made only as much as the President of the United States.

The report — invitingly titled “Information on the Impact of Reducing the Cap on Employee Compensation Costs” — was mandated as part of the National Defense Authorization Act for the current fiscal year, to find what sort of savings were to be had if the cap on the amount that defense contractors could charge the federal government was lowered. At present, the cap on the amount of compensation that contracting firms can charge the federal government per employee stands at a mind-boggling $763,029 for 2011 and 2012, up from $693,951 in 2010.

Specifically, the act charged the Government Accountability Office (GAO) with seeing the effect on moving the cap back downward, setting the level at the annual salary of the President or Vice-President. Under law, President Obama currently makes $400,000 per year — the highest amount in the federal government — and Vice-President Joe Biden is paid a salary of $230,700 annually. According to their report, the GAO found that contractors “identified over $180 million per year in compensation costs that would have exceeded a cap set at the President’s salary, and at least $440 million per year if set at the Vice President’s salary.”

From this, Brown concludes,

That the government currently overpays defense and intelligence contractors is no secret. The Office of the Director of National Intelligence recently reported that it pays contractors 1.66 times as much as a federal employee for the same work. Likewise, a 2007 Senate report found that the average contractor in the intelligence community made almost double what a similar federal worker would. This spending comes in the face of mandated budget cuts across the Pentagon which, despite the negative effects they are having on national security, exempt currently signed contracts from their effects.

I’d begin by noting that both $180 million and $440 million, the purported savings to be gained by capping salaries at the level of the president and vice president, respectively, are tiny numbers in relation to not only the federal budget but to the budget deficit. Now, obviously, one has to start somewhere. And if this is in fact “overpayment,” then I agree that this is as good a place as any to start. But that’s not obvious.

The fact that a contractor costs a given amount of money does not mean he or she is being paid that amount of money. That’s irrelevant to the taxpayer, of course–cost is cost–but it’s important in understanding the numbers. I worked as a contractor for the Defense Information Systems Agency for a couple of years some time back and cost the government more than the salary of the GS-15 to whom I reported. My actual salary was significantly less than hers but the additional overhead expenses (which paid for management at my base employer, health care, retirement contributions, etc.) nonetheless cost the government a lot of money. The upside, of course, was that they could stop paying me as soon as my contract ran out if they no longer needed my services. That’s not the case for a civil service employee. Additionally, the salary of a civil servant is, as it was for me as a contractor, but a fraction of the total cost to the taxpayer.  (And, of course, in the specific case of the president, the $400,000 annual salary is actually a tiny portion of his cost to the taxpayer.)

As the executive summary of the GAO report notes, there are plenty of reasons why contractors cost more in the short term:

DOD noted that it fully supported the principle of paying only reasonable compensation costs and some DOD officials supported reducing the cap, though DOD cautioned that there are limited data on the potential impacts of doing so and that the impact on the defense industry would need to be carefully monitored and assessed. Industry associations and contractors representatives noted that the compensation they offer to their employees is generally based on market surveys of compensation paid by private sector companies. While acknowledging that a reduced cap would not preclude them from compensating their employees above the cap, contractor representatives noted that doing so would come at the expense of company profits, which in turn may result in challenges in attracting capital from the financial markets. They also noted that reducing the cap may affect companies’ ability to attract and retain top talent and, over the long term, lead companies to reassess their business and staffing models and potentially shift work or personnel from government business to their commercial sector.

People are willing to take comparatively lower salaries as civil servants for a variety of reasons. Most notably, sequestration notwithstanding, it comes with substantial job security. Talented employees working on a year-to-year basis are naturally going to command more money than they would with a guaranteed contract.

There are at least two reasons why the Defense Department has outsourced so much of its work to contractors. First, it’s to gain flexibility, essentially side-stepping the red tape of the bureaucratic civil service personnel system. To the extent it’s that’s valuable, it’s worth paying for. Second, it’s to sidestep limits on permanent employment, especially to meet increased wartime needs. That’s probably wasteful, although more Congress’ fault than DoD’s.

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Sam Malone says:

    This is a red herring…it’s not much money and it is money that is well spent for the most part…as you described in your own experience.
    In addition it is a pointless discusion because, as we all know, Defense is off-limits…sacrosanct.

  2. al-Ameda says:

    Edward Snowden was part of that contractor/subcontractor establishment – are you against privatization and all the efficiencies therein?

  3. Dave Schuler says:

    Incentives. I wonder how much of this is due to cost-plus.

  4. Dave D says:

    doing so would come at the expense of company profits, which in turn may result in challenges in attracting capital from the financial markets.

    I have a hard time believing that a.) these companies would compensate above a cap at the expense of profit. or b.) That defense contractors that obtain lucrative contracts from the government would ever have trouble attracting capital.
    The likelihood of anything being done about this is also very small. The dense industry lobbyists on the Hill will definitely see to that.

  5. Pinky says:

    @Sam Malone: Sam, do you have any idea how many cuts there have been in recent years to the Defense Department? There were the cuts from the phase-out of military operations in Iraq and Afghanistan, then $1.3 trillion over 10 years (if I remember correctly) from budget deals other than the sequestration, and of course the sequestration deal, half of which falls on Defense. Defense isn’t sancrosant these days at all.

  6. Sam Malone says:

    Pinky…
    Ffair enough…but to a country that spends almost as much as the entire rest of the world…43% of the worlds defense budget and almost 6 times what our nearest competitor, China, spends…those are superficial cuts at best.

  7. anjin-san says:

    Meanwhile, NASA has to beg for relatively trivial amounts of money…

  8. Scott says:

    This seems to be a very poor study. Comparing the revenue per contracted employee received to the salary (not the total compensation package) of the President is not just a bad apples to oranges comparison but a bad apples to apple jacks comparison. Nonsensical.

  9. steve says:

    This is not as much as the football coach at the Air Force Academy makes.

    http://sports.espn.go.com/ncf/news/story?id=3849970

    Steve

  10. DC Loser says:

    As someone who has many years on the government side of the IC now that I’m the contractor side, there’s a lot less here than would appear from the article. Currently, the government are already reducing IC contractor wages in many cases by 25-40%. Gone are the days when somebody can expect $200k pay for a year in Afghanistan. With the wars winding down, it’s simple supply and demand, even for those with top secret clearances. As James says, the true cost of a government employee is a lot more than the salary (Social Security, health care, retirement benefits, etc.). If you take all those into account, contractor salaries are very close to government ones, and the government also has the flexibility to let contractors go without cause, something it can’t do with government employees.

  11. Just Me says:

    Also, a contractor is much easier to move off the books than a civil servant employee.

    Are there savings to be had? Probably but I suspect over the long term a civil servant employee costs more money because outside of a few for a few offenses once on the books they stay there until retirement and the government pays for that as well.

    The hired contractor works as long as the contract is needed.

    I am all for looking at expenses and possible savings but I imagine as 2014 approaches and the uUS pulls out of Afghanistan that the need for contractors will shrink unless we end up in some other conflict.

  12. 11B40 says:

    Greetings:

    Apparently your well documented education didn’t include a bit of Babe Ruth’s wit and wisdom. When asked about his making more money than the US President, the baseball great supposedly answered that he had had a better year than the President.

    I also think that your observation disregards the actuality that US Presidents seem to be on a delayed payment plan salary-wise, no doubt with IRS approval, from which future earning flow down like the waters of justice or something.