Compensation/Withdrawals in 8(a) Companies The majority of the rules dealing with the SBA 8(a) program come from the Code of Federal Regulations (CFR), which is the codification of the general and permanent rules and regulations (sometimes referred to as administrative law) and are published in the Federal Register by the executive departments and agencies of the federal government. Administrative law exists because Congress often grants broad authority to executive branch agencies to interpret the statutes in the United States Code (and in uncodified statutes) that the agencies are entrusted with enforcing. Congress may be too busy or congested to micromanage the jurisdiction of those agencies by writing statutes to cover every possible detail. Regarding the compensation of owners of 8(a) firms, 13CFR124.112 states the following: “Excessive withdrawals - The term withdrawal includes, but is not limited to the following: officer’s salary, cash dividends, distributions in excess of amounts needed to pay S Corporation taxes, cash and property withdrawals, bonuses, loans, advances, payments to immediate family members, investments on behalf of an owner, officer, or key employee, acquisition of a business not merged with the 8(a) participant, charitable contributions and speculative ventures.” Withdrawals are considered excessive if during the fiscal year they exceed $150,000 for firms with sales up to $1 million; $200,000 for firms with sales between $1 million and $2 million and $300,000 for firms with sales over $2 million. The fact that a concern’s net worth has increased despite withdrawals that are deemed excessive will not preclude the SBA from determining that such withdrawals were detrimental to the attainment of the concern’s business objectives or to its overall business development. Executive compensation is how top executives of business corporations are paid. This includes a basic salary, bonuses, shares, options and other company benefits. Over the past three decades executive compensation has risen dramatically beyond the rising levels of an average worker’s wage. Executive compensation is an important part of corporate governance, and is often determined by a company’s board of directors. The Defense Contract Audit Agency has set up a compensation review team that has unique training and qualifications to conduct reviews of compensation. This team was assigned to the Mid-Atlantic Region. It conducts surveys based on geographic area of the company, size and revenue of the company, industry in which the company operates and other measuring factors. The compensation team uses these surveys to compute averages. Often contractors will propose that their executives should be paid more than the reasonable compensation amounts based on the average compensation paid by comparable firms for executives with similar duties. For an executive with responsibility for overall management of a segment or firm, such a proposal may be justified by clearly superior performance as documented by financial performance that significantly exceeds the industry averages. Examples of financial performance measures may include the following: •Revenue growth •Net income •Return on shareholder’s equity •Return on ssets •Return on sales •Earning per share •Return on capital •Cost savings •Market share The ramifications of taking excess compensation includes being excluded from future 8(a) awards and can lead to criminal penalties. Falsely certifying as 8(a) eligible when you are not in the program or have graduated is a criminal offense as well. It is a criminal offense to misrepresent in writing the status of a concern as a small business in order to obtain a prime contract award pursuant to Section 9 or 15 of the Act (15 U.S.C. & 638 and & 644) or subcontract awarded pursuant to Section 8(a) of the Act. The punishment for this offense is imprisonment of not more than 10 years or a fine of not more than $500,000 or both. It can also result in certain administrative penalties, such as debarment from further contracting with the government. Generally the disadvantaged person who owns controlling interest in the 8(a) firm must be its highest-paid officer. DCAA allows non-disadvantaged individuals to participate in the management, but their total compensation may not exceed that of the highest officer (usually the CEO or president). The highest-ranking officer may choose to take a lower salary than a non-disadvantaged individual only upon demonstrating that it helps the company. You must obtain prior written consent from SBA before paying a non-disadvantaged individual more than the highest-ranking officer. It is always important to keep in mind when dealing with the government that excess in any area of cost reimbursement can be considered fraudulent and cause you to lose business. Bill Fallon is a manager with the firm of Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony services to the government contracting industry. He can be reached via email at BillF@FedStrat.com.