The Obama administration has proposed changing how the government sets limits on the reimbursement of salaries of contractor companies' senior executives.

The current formula for reimbursement sets the cap using a survey of commercial compensation but the administration wants to tie the cap to the salaries of senior-most federal officials - specifically, Executive Schedule Level I, which currently pay $200,000 a year

Congress will have to pass new legislation to make the change.

The Office of Federal Procurement Policy is legally required to determine the amount of compensation, such as salaries and bonuses that the government will reimburse for, based on available surveys on executive pay at publicly traded U.S. companies with more than $50 million in annual sales

In 2010, the OFPP allowed reimbursements for contractors' top five executives to reach a total of $693,951. The Obama administration now is concerned that, based on surveys reimbursements could reach $750,000 in 2011.

"It's that payment that strikes us as excessive," Dan Gordon, administrator of the OFPP, said Sept. 20.

Gordon said no one anticipated that the salary cap would increase as quickly as it has when the formula was designed. But at a time when federal employees' salaries are frozen, "it seems unreasonable to continue to dramatically increase the amount that we compensate."

So now, the administration wants to reset the Executive Compensation Benchmark to equal out pay between federal and contractor executives' compensation.

Although this will not affect small businesses at this time it is an example of unwarranted intrusion by the federal government into the private sector. There are multiple regulations in both the F.A.R and the DCAA accounting manual that make contractors justify their rates or salaries and their G&A and Overhead costs. These all impact a contractor's cost competitiveness and are a "self-regulating" tool for executive salaries. That is, it is not in the best interest of contractors to pay their executives an "excessive" amount unless they want the marketplace to judge them as not cost competitive.

Bottom line: Should the federal government establish what an "excessive" salary is for contractor executives or should they let the marketplace determine executive salaries as it will "punish" those which might be "excessive"?