Compensation Audits

On January 18, 2012, the Armed Services Board of Contract Appeals found that the Defense Contract Audit Agency’s (DCAA) method for analyzing the reasonableness of Executive Compensation (under FAR 31.205-6) had “statistical flaws.” The decision in Appeals of J.F. Taylor, inc. addressed J.F. Taylor’s challenge to the results of Executive Compensation Reviews (ECR) over four fiscal years.

The DCAA ECR methodology was challenged on several grounds, with statistical validity as the central focus. Among the statistical critiques, the company alleged the DCAA's method:

• Ignored compensation survey data • Employed an arbitrary 10% “range of reasonableness” allowance • Ignored differences in survey sizes, and • Failed to consider the company’s financial performance and other pertinent factors which contribute to compensation variations

Since the Board observed that the Government made no attempt at the hearing or in its brief to respond to the statistical arguments, they ruled that: … “we are left with unrebutted evidence that the methodology used by DCAA was fatally flawed statistically and therefore unreasonable.”