Americans don’t like Big Business. And they don’t like government waste. Put the two together, and we have a nightmare scenario: public money lining the pockets of corporate bigwigs.
Even as federal government workers’ pay is repeatedly targeted for reductions and average Americans’ wages have either stagnated or declined, the amount the government pays to the executives of firms that live off of government contracts has soared over the past 15 years.
Currently, federal government contractors can charge taxpayers up to almost $1 million annually for each contractor employee’s compensation. This is up from $250,000 in 1998 when it was set by law — this cap has increased at a pace that regularly exceeds the rate of inflation.
Large corporate contractors — many of which subsist almost entirely off of government largesse, mostly from the Pentagon — pay their executives many times the amount they charge the government for reimbursement, but the public still pays for their compensation because of their high profit margins.
For instance, in just CEO pay in 2012 alone, Lockheed Martin’s Robert Stevens made $27.5 million (82 percent of Lockheed Martin’s revenue is from government contracts), Northrop Grumman’s Wesley Bush made $24.4 million (90 percent of the firm’s revenue is from government contracts), and Huntington Ingalls’s C. Michael Petters made $14.9 million (his company gets 100 percent of its revenue from government contracts).
These enormous salaries are possible because the profits military contractors get from government work are huge.
Don’t take my word for it. A 2012 study by two professors of financial management at the Naval Postgraduate School determined that “when compared with their industry peers, defense contractors earn excessive profits” and that this has become more pronounced since 1992. These companies, by the way, don’t tend to have great track records when it comes to doing their jobs on time and on budget. So why are their execs getting mammoth paydays?
And why not at least reduce the amounts contractors can charge for high-salaried employees?
A bipartisan group of senators and some members of the House have legislation that would do just that. They’d like to reduce this amount to the vice president’s salary, which is currently $230,700 with a narrow exemption for scientists, engineers, and other specialists if a government agency believes higher salaries are necessary to ensure access to individuals with specialized skills. As recently as 2012, President Barack Obama endorsed an even lower cap.
The potential savings aren’t chump change. Demos, a research group, estimated that a cap of $230,700 could lead to annual savings of around $7 billion. There are lots of better things this money could be used for than lining CEO’s pockets. It could pay for education, infrastructure investment, or scientific research that could help rebuild a vibrant middle-class and an economy that lifts people out of poverty.
The new budget deal brokered by Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) wouldn’t go as far as the other plan, but it would nearly halve the compensation cap to $487,000, which is roughly what the subsidy cap would be if it had only kept pace with inflation since 1998. This is a step in the right direction, but clearly more could be done.
As to be expected, the high-powered lobbyists of these contractors have fought these common-sense reforms with their usual misinformation. After all, they get paid big bucks to keep the money spigot open and flowing.
Yet the status quo is clearly out of whack and something needs to change. As Obama stated in his recent income inequality speech, “government can’t stand on the sidelines in our efforts” to create a more equal society.
Excessive CEO compensation is one of the factors making inequality worse — in 2012, the average CEO-to-worker pay ratio at companies in the S&P 500 was 354-to-1. Government contracting policies should be bucking this trend not making income inequality worse.