A Public Spotlight on Executive Compensation By Isias Alba, Esq. A new interim rule will require many small contractors to disclose their top executives’ pay. The rule, FAR 52.204-10, was recently enacted by the Federal Acquisition Regulation Council requiring contracting officers to include the provisions in most new solicitations and contracts valued at $25,000 or more; and in existing indefinite delivery, indefinite quantity contracts, including blanket purchase agreements under IDIQ contracts and Federal Supply Schedule contracts, via bilateral modification. Prime contractors will be required to report the names and total compensation of each of the prime contractor’s five most highly compensated executives for the preceding fiscal year, as well as the same information for the executives of its first-tier subcontractors. This information must be provided by the end of the month following the month of a contract award. In both the case of prime contractors and first-tier subcontractors, reporting will be required only if the company received more than $25 million in federal contracts and where that company derived over 80% of its annual gross revenue from federal contracts in its preceding fiscal year. The information reported under this new requirement will be made publicly available via the internet. Aside from the executive compensation disclosures for both prime and subcontractors, prime contractors will also be required to report details regarding subcontractor awards, worth $25,000 or more, made under prime contracts valued at $550,000 or more (decreasing to $25,000 or more on March 1, 2011). This information will also be publicly available on the internet. As the interim rule is new, and in some cases broad or even vague, the specifics on how it will work in practice are still an open question. That said, the following is what we know so far: The FAR Council has estimated that the new rule will apply to over 600,000 small businesses, with more being affected each year as businesses continue to grow. Further, the new rules will have a disproportionate impact on small businesses because (1) many large businesses are exempt from these new requirements due to the fact they already report this information to the Securities and Exchange Commission; and (2) unlike with SEC filings, which can be somewhat complicated and time consuming to comb through, the new reporting under the FAR with be extremely easy to access for anyone with an internet connection. Thus, the average person will have easier access to the salary information of small business executives than those of Fortune 500 companies. In addition to the obvious privacy implications, the vagaries in the rules will cause uncertainty for prime contractors and subcontractors. Although the rules define the term “executive” to mean “officers, managing partners, or any other employees in management positions,” the term “management position” is left undefined and open to various interpretations. As such, contractors may not know exactly which employees are subject to the reporting requirement. The risk that compensation may be disclosed could cause top talent to reject employment with federal contractors or to resign from current positions with contractors. Moreover, even the definition of the term “total compensation” is vague. While the rule enumerates elements of total compensation and references the SEC’s regulations, it also includes a catch-all category of “other compensation” which will certainly cause confusion as to what monies are, or are not, considered compensation. In addition to the definitional uncertainties, prime contractors could face other difficulties complying with the rules because the reporting obligation, for both prime contractor and subcontractor data, is imposed on the prime contractor alone. Indeed, there is no affirmative obligation on subcontractors to report the information to the prime contractor. Thus, the prime contractor may face penalties, including the possibility of termination, if subcontractors simply refuse to provide the necessary data. Of course, this can be mitigated by ensuring that the subcontract is clear that, if the new FAR requirement applies, the subcontractor must provide the information or risk a breach of contract action, including possible consequential damages. Prime contractors may even want to include terms for injunctive relief as termination could harm the prime contractor’s reputation and ability to pursue future work. While it is not clear when the FAR Council will publish the final rule, in the interim, contractors should continue efforts to comply with the new requirements by establishing systems to promptly collect and report information to the government. Unfortunately, for the foreseeable future, executives of federal contractors and subcontractors should expect little to no privacy with regard to their level of compensation, and the companies themselves should be prepared for fully transparent subcontract awards. Isaias “Cy” Alba, Esq. an associate with PilieroMazza, practices primarily in the areas of government contracting matters and general corporate law, advising clients in a broad range of matters, including small business programs, size and bid protests, suspensions and debarments, and drafting and reviewing contracts and subcontracts. He can be reached at ialba@pilieromazza.com.