A. Disclosure of Executive Compensation

Comment: A number of respondents objected to the reporting of total compensation, as required by the rule, for several reasons including that total compensation is generally not allowable under FAR 31.205-6 or cost-reimbursement contracts, such information is outside the scope of the taxpayer's interest, and the information will have no practical utility. Another respondent believed that the rule should be updated with a provision that subcontractors who submit executive compensation information to the Defense Contract Audit Agency (DCAA) need not provide it to prime contractors. A respondent requested that the rule be clarified to provide that only the allowable portion of an officer's salary is reported. Several respondents stated that total executive compensation is already being reported to the Government annually through an incurred cost submission (see FAR 52.216-7(d)).

Response: The public disclosure of executive compensation information implemented under this rule is a statutory requirement. The law does not limit reporting to the amount funded or reimbursed by Federal funds, nor does the law make an exception for situations in which a contractor or subcontractor is already reporting executive compensation through an incurred cost submission. Therefore, the Councils cannot create such an exception. Moreover, information reported to DCAA is not public information, and DCAA is not authorized to release that information. No change to the rule is required.

Comment: A number of respondents were concerned that publishing executive compensation information will create discord, envy, and turnover.

Response: The public disclosure of executive compensation information implemented under this rule is a statutory requirement. Contractors have publicly disclosed executive compensation through the Securities Exchange Act (SEC) of 1934 15 U.S.C. 78m(a), 78o(d) or section 6104 of the Internal Revenue Code of 1986 for years through periodic reports, prior to the advent of the Transparency Act.

Comment: A respondent stated that most commercial companies lack the required systems to track, monitor, and calculate the required compensation information requested for prime contractors and their first-tier subcontractors. Two respondents thought that the requirements will be burdensome because small businesses, including first-tier subcontractors, are unaccustomed to such requirements and do not have infrastructure in place to comply.

Response: There may be some burden (i.e., one-time start-up cost for the infrastructure to collect or report the information should be a one-time cost) associated with the reporting required by this rule. Additionally, the Councils have revised the rule at FAR 52.204-10(a) to lessen the potential burden by clarifying the definition of "first-tier subcontractor."

Comment: A number of respondents believed that executive compensation information is proprietary. They suggested that this type of information is not currently disclosed to the public, even pursuant to Freedom of Information Act (FOIA) requests.

Response: The public disclosure of executive compensation information implemented under this rule is a statutory requirement mandated by Congress. This statute has created an exception to the usual practices for handling contractor proprietary information. The FOIA exemption for contractor proprietary information does not forbid release of this information.

Comment: A respondent stated that making the amount of an employee's compensation available to their Government counterparts may have a significantly detrimental impact on these critical working relationships.

Response: This rule implements a statutory requirement for the disclosure of executive compensation.

Comment: A number of respondents stated that disclosure of executive compensation may translate into safety issues for the executives, their families, and potentially, U.S. Government personnel outside the United States. The respondents opined that executives or their families could be subject to extortion, blackmail, or kidnap as a result of these disclosures.

Response: The public disclosure of executive compensation information implemented under this rule is a statutory requirement. This rule does not require contractors to disclose the home addresses of executives or U.S. Government personnel.

Comment: A number of respondents stated that disclosing compensation information will create risk that a company may lose its key personnel to raiding by competitors. According to the respondents, this potential outcome will drive some contractors and subcontractors out of the Government contracting arena and, by implication, deprive the Federal Government of access to cutting edge technologies and ideas, and increase the Government's costs by reducing competition. These respondents also suggested that competitors may be able to use compensation data for executives who serve multiple roles to determine their pricing strategies. These respondents further opined that competitors who fall below the reporting threshold set forth in the rule will have an unfair advantage.

Response: Disclosure of executive compensation could have some anti-competitive aspects, which may ultimately result in increased contract costs for the Government and the taxpayer. However, the public disclosure of executive compensation information implemented under this rule is a statutory requirement mandated by Congress. The disclosure of such information was established in order to increase transparency in Government contracting. The exceptions to the disclosure requirement implemented in the rule such as the 80 percent/$25 million exception, the $300,000 gross income exception, and the definition of "first-tier subcontract," will substantially reduce the number of contractors that would otherwise be required to report such information.

Comment: A number of respondents expressed the view that "providing this information or any other type of proprietary data to prime contractors could jeopardize a contractor's competitive position". Those respondents stated that it is not unusual for a subcontractor to be a prime contractor on one effort, and competing with that same contractor on another effort. The respondents further opined that the Government has typically not asked that subcontractors provide such proprietary information to prime contractors. Another respondent noted that "* * * currently this data is being requested and stored on a public facing Web site" (www.ccr.gov), and questioned how the Government would ensure that the data is protected from hackers or inadvertently disclosed by a contracting officer.

Response: The correct interpretation of the nature of the statute and rule is that prime contractors will not hold the information to themselves, but instead must enter the information into a database; the compensation information will be available on the internet to everyone as public information.

Comment: A number of respondents recommended revising the rule to require a flowdown clause to allow subcontractors to report executive compensation directly to the Government. They indicated that flowing down the requirement would reduce the administrative burden on the prime. One respondent recommended a "safe harbor" for prime contractors to address situations in which subcontractors fail to provide the information, so that any failure does not reflect negatively on the prime contractor's performance evaluation. A respondent recommended revision of the rule expressly permitting prime contractors to rely on their subcontractors' determinations as to whether they must disclose compensation data under the rule.

Response: The Federal Government has no privity of contract with subcontractors and is therefore reluctant to establish communication channels that could potentially be construed as creating a contractual relationship. The Federal Government has privity of contract only with the prime contractor. Therefore, the prime contractor will be held accountable for ensuring that their subcontractors provide the necessary information for contract compliance. Because Transparency Act reporting is statutorily required, compliance with reporting should remain a consideration as a past performance evaluation element.

Comment: A respondent indicated that no process exists to ensure accuracy in reporting executive compensation, either to verify or monitor the accuracy of reported information. Several respondents requested clarification of the contractor's obligation to verify the accuracy of its subcontractor's information. One stated that the prime cannot guarantee the accuracy of the disclosures and should not be responsible for their accuracy.

Response: The law requires a searchable Web site for reporting, and FSRS at www.fsrs.gov, is the reporting tool used by the Federal Government to reduce contractor burden. One of the features of FSRS that will mitigate the burden of prime contractor reporting of first-tier subcontractor executive compensation is the capability of the FSRS system to pre-populate FSRS entries with information from other Government systems including the Central Contractor Registration (CCR). Furthermore, the clause at FAR 52.204-10(d)(3) indicates that the prime contractor is required to report the names and total compensation of the five most highly compensated executives for each first-tier subcontractor. The prime contractor should (1) hold first-tier subcontractors responsible for complying with this contractual reporting requirement under its contract with the Federal Government; and (2) hold the first-tier subcontractor responsible for guaranteeing the accuracy of the compensation information.

Comment: A respondent recommended that the rule end the prime contractor's obligation to report first-tier subcontractor information upon completion of the subcontract.

Response: The final rule was revised at FAR 52.204-10(f) and requires reporting first-tier subcontractor's information (including executive compensation) at least once, but further reporting is not required upon the completion of the first-tier subcontract.

Comment: Several respondents noted that all contractors, whether large or small, are required to provide the requested compensation data on the CCR. They opined that it is redundant to ask prime contractors to submit data on their first-tier subcontractors in www.fsrs.gov when such information already resides in the CCR. Those respondents also stated that since all contractors are required to furnish compensation data on the CCR, the Government should consider eliminating the requirement for the prime contractor to report its subcontractor's compensation data on http://www.fsrs.gov.

Response: The Transparency Act requires that information on Federal awards (Federal financial assistance and expenditures) be made available to the public via a single, searchable Web site, which is www.USASpending.gov. FSRS is the reporting tool Federal prime awardees (i.e., prime contractors and prime grants recipients) use to capture and report subaward and executive compensation data regarding their first-tier subawards to meet the Transparency Act reporting requirements. To ensure consistency between the FSRS.gov system and other Government systems, the FSRS.gov system is designed to pull in data from other feeder systems (e.g., CCR). There is no requirement for subcontractors to be in CCR. Thus, it is not the case that all subcontractors will be in CCR. So, eliminating the requirement for the prime contractor to report its subcontractor's compensation data on http://www.fsrs.gov would not allow the Government to meet the intent of the Transparency Act. The prime needs to report the first-tier subcontractor information at http://www.fsrs.gov. However, if a first-tier subcontractor is otherwise registered in CCR, the first-tier subcontractor's executive compensation information from their CCR record may be pulled into the prime contractor's FSRS report when the prime contractor enters the first-tier subcontractor's information as it appears in the CCR record. The Councils added clarification language at FAR 52.204-7 to make contractors aware that data may be required by the Transparency Act when registering in CCR. Also, a corresponding change was made at FAR subpart 2.1.

Comment: Several respondents believed that the rule and CCR guidance conflict when it comes to defining the public company exemption, and recommended that the final rule and CCR guidance be reissued to define the contractor's executive compensation to include "all affiliates". A respondent recommended that the rule be revised to state that reporting is not required if the total compensation of the contractor's executives or the executives of its parent company (in the case of wholly owned subsidiaries) is already available to the public, regardless of whether it was filed with the U.S. Government, a State government, or a foreign government. One respondent believed that the rule appropriately places the disclosure requirement with the entity that receives the contracts.

Response: The rule and CCR guidance do not conflict. CCR requires reporting of executive compensation, under certain circumstances, by the legal entity to which this specific CCR record, represented by a Data Universal Numbering System (DUNS) number, belongs. The rule requires reporting by the contractor. The contractor is the legal entity that signed the contract. The contractor, except in certain circumstances as specified in FAR 4.605(b), has to have a DUNS number to be a Government contractor and receive a contract award. There may be legal entities that are not publicly traded but are wholly owned by public companies. However, the statute did not make an exception for reporting of a legal entity at lower levels of a publicly traded company if the parent company already discloses the executive compensation through the Securities and Exchange Commission (SEC) reporting. The exceptions for reporting executive compensation are based in the statute. Therefore, the Councils cannot create an exception for information already available through other sources. No change to the rule is required.

Comment: A respondent indicated that in order to keep total compensation information confidential within the company, the rule forces the company to limit internal access to the CCR system. This will require the respondent to modify its existing business practices, and to restrict access away from individuals whose job responsibilities normally include accessing and updating the CCR system.

Response: The respondent's possible internal adjustments to comply with reporting requirements of the rule are noted. However, even though the information will not be viewable in CCR by the general public, the executive compensation will be made public (including to contractor employees), if not already as a result of SEC filings, through other Government systems (e.g., USASpending.gov) when matched with a Federal award to that company.

Comments: Several respondents requested that the subsidiaries of a parent company limit the executive compensation reporting to the parent company. A respondent had a concern with the reporting requirement, and its effect on joint ventures since there are no officers in a joint venture. Several respondents requested modification to the reporting requirements to exempt from reporting institutions of higher education, hospitals, other non-profit organizations and organizations that do not have salaries or other compensation as defined in the rule. A respondent requested changes in the exemption for reporting the percentage and amounts of annual gross revenue, and potential for disparities in reporting between companies. The respondent also requested clarification on an exemption when the executive compensation was provided in the last completed fiscal year.

Response: The thresholds and exemptions in the rule at FAR 52.204-10(d)(1), (d)(3), and (g) are based in the statute. The Transparency Act reporting requirements apply to all businesses, regardless of business size or ownership, and the Act did not make exceptions for subsidiaries of a parent company, joint ventures, institutions of higher education, hospitals, and other non-profit organizations. The disclosure of executive compensation is required annually for individuals who manage the contractor entity. Thus, the reporting requirement includes officers, executives, and other individuals who perform management functions for the contractor even though they may not have a formal title. Additionally, the Transparency Act established the gross revenue amounts that are reflected in the rule.

Comment: A number of respondents submitted general comments regarding the rule's executive compensation reporting requirements. A respondent was concerned about the rationale behind the rule and believed that it is "pure politics." Several respondents had concerns about the rule's impact on acquisitions under the Recovery Act, and the rule's disclosure requirements. A respondent was concerned that the Recovery Act procurement contracting officers required the disclosure information with an offeror's response to a request for proposal, but noted that neither the interim rule nor the Transparency Act provides for such disclosure. The respondent requested that the Councils issue guidance stating that the disclosure information is only required postaward. A respondent was concerned that the rule overestimates the degree to which contractors are already reporting the disclosure requirements under the Recovery Act, and believed that the Councils' reliance upon the Recovery Act as a substitute for rulemaking required by the Transparency Act, and the Government Funding Transparency Act is improper. The respondent believed that the Councils obscured the application of the reporting requirements, and negatively impacted contractors' understanding of their application to other Federal procurements by imposing the disclosure requirements for the first time under the Recovery Act. The respondent suggested that the rule be amended to allow the Councils additional time to fully consider important comments, and contractors' time to prepare and assess the implication of the reporting requirements.

Response: The impetus for the rule is the Federal Funding Accountability and Transparency Act of 2006 (Transparency Act), which is intended to empower every American with the ability to hold the Government accountable for each spending decision. With respect to the respondent requesting guidance stating that the disclosure information is only required postaward, FAR 52.204-10(c)(2) and (c)(3) (now (d)(1) and (d)(3)) provide disclosure requirements. FAR 52.204-10(d)(1) requires a prime contractor as a part of its annual registration requirement in the CCR database to report the names and total compensation of each of its five most highly compensated executives for its preceding completed fiscal year. FAR 52.204-10(d)(3) requires that the prime contractor disclose first-tier subcontract information by the end of the month which follows the month of award of a first-tier subcontract award with a value of $25,000 or more, and annually thereafter. The decision to proceed with implementation of this rule is not based on an overestimate of the degree to which contractors are already reporting the disclosure requirements under the Recovery Act. After publication of FAR Case 2006-029, and implementation of the Recovery Act (inclusive of reporting prime and first-tier subcontractors' total compensation for the five most highly compensated executives), published under FAR case 2009-009, there was a reasonable basis for implementation of the Transparency Act. Additionally, as stated in the interim rule, the Councils implemented the Transparency Act in a phased-in approach to allow for a more manageable Transparency Act implementation.