Bonus and Incentive Compensation

Allowable or Unallowable: Allowable

Source: "Federal Acquisition Regulation (FAR)" is not in the list of possible values (Other, FAR, DFAR) for this property.

Bonuses and Incentive Compensation - FAR 31.205-6

Bonuses and incentive compensation are generally allowable, subject to notable items below.

Conditions and Descriptions Determining Allowability;

Awards must meet the following criteria under 31.205-6 (f);

• (i) Awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment; and

• (ii) Basis for the award is supported.

(2) When the bonus and incentive compensation payments are deferred, the costs are subject to additional requirements, under section (k) of this subsection of FAR, which states;

(k) Deferred compensation other than pensions. The costs of deferred compensation awards are allowable subject to the following limitations:

• (1) The costs shall be measured, assigned, and allocated in accordance with 48 CFR 9904.415, Accounting for the Cost of Deferred Compensation.

• (2) The costs of deferred compensation awards are unallowable if the awards are made in periods subsequent to the period when the work being remunerated was performed.

Notable Unallowable elements of Bonus Plans

• 1.Deferred compensation award subsequent to the period when the work being remunerated was performed, as shown above.

Elements described under (i) of the Subsection

(i) Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions.

• (1) Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable.

• (2) Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable.

• (3) If a contractor pays an employee in lieu of the employee receiving or exercising a right, option, or benefit which would have been unallowable under this paragraph (i), such payments are also unallowable.

Additional Note for Closely Held Corporations

Under FAR 31.206 (a)(6)(i) (6)

(i) Compensation costs for certain individuals give rise to the need for special consideration. Such individuals include:

• (A) Owners of closely held corporations, members of limited liability companies, partners, sole proprietors, or members of their immediate families; and

• (B) Persons who are contractually committed to acquire a substantial financial interest in the contractor’s enterprise.

(ii) For these individuals, compensation must—

• (A) Be reasonable for the personal services rendered; and

• (B) Not be a distribution of profits (which is not an allowable contract cost).

• (iii) For owners of closely held companies, compensation in excess of the costs that are deductible as compensation under the Internal Revenue Code (26 U.S.C.) and regulations under it is unallowable.

Additional References

• DCAM 5-800 - Compensation System Reviews (CSR) and Audit of Internal Control
• DCAM 6-413 - Reasonableness of Compensation Costs
• DCAM 6-414 - Reasonableness of Compensation Costs of Owners, Executives, and Other Employees Having a Higher Risk of Unreasonable Compensation