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Executive pay balloons for federal contractors; small businesses add up to big gap

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Red River Computer Co., which resells Cisco, Apple and Dell computers to the government, is a company with only 68 employees, yet it paid its top executives more than $5 million in 2011, including $1.2 million to its CEO, Richard Bolduc.

With more than 80 percent of its revenue coming from the federal government, the source of those salaries is clear.

In March 2011, Red River sold the Census Bureau an Apple MacBook Pro for $4,648. Red River was given preference because of its status as a small business. In 2010, it sold an Apple MacBook Pro notebook computer to the Air Force for $6,584. The newest model of that computer can be purchased online from Apple Inc. for $2,799.

"That revenue is basically all coming from taxpayers in the end," said Scott H. Amey of the Project on Government Oversight.

At least 77 contractors whose revenue came nearly entirely from taxpayers each paid their top five executives more than a combined $3 million a year, a total of $633 million, The Washington Times found in an analysis of federal contracting data. Contracting disclosures exempt publicly traded companies, meaning the list represents a small fraction paying big bucks with federal dollars mostly small and unknown companies, with the largest and highest-paying, such as Lockheed Martin Corp., not counted.

As a budget crunch has put public employees' salaries in the public eye, these business executives, whose primary source of compensation comes from the same place as government employees', remain out of the spotlight. But with the Defense Department and other departments forced to make cuts under the so-called sequester, where their contracting dollars go is relevant.

The Times examined the finances of companies that derived more than 80 percent of their income from the federal government and received at least $25 million in contracts annually.

Lakeshore Engineering Services Inc. is an 80-employee Michigan business that uses its minority-owned status to grab federal contracts and then subcontracts most of the work to other firms, according to stimulus disclosures, with revenue between $10 million and $40 million, and at least 80 percent of its revenue coming from those contracts. The company augmented its income by obtaining city contracts in Detroit after hiring a close friend of the mayor for sometimes no-show work, according to testimony in the corruption trial of former Mayor Kwame Kilpatrick.

In all, it's a relatively small business except that the more than $6 million paid to its top five executives annually place it among much higher fliers. Ketul Parikh alone made $2.4 million in 2012.

Lawman Heating and Cooling Inc., a New York company with 300 employees, paid $10 million to its top executives, most of whom are members of the Lawler family, making the Lawlers compensated more highly by taxpayer dollars than all the Cabinet secretaries combined.

Atlantic Diving Supply Inc. did $1 billion worth of business with the government in fiscal 2012 and paid $9 million to its executives, including $2.2 million to Jason Wallace. The prior year, with fewer federal contracts, its revenue from government and nongovernment sales was $350 million.

The amount per executive for which a contractor can bill the government is capped at $763,029, but that does not mean the company can't pay its officers more, drawing from its general pool of profits, including profits gleaned from government contracts.

In January 2012, the White House wrote that "Congress put a cap on how much taxpayers would reimburse these executives in the 1990s, but that cap was tied to pay levels of the nation's top private-sector CEOs and other senior executives. As a result of skyrocketing CEO pay, the tab for taxpayers has soared to unreasonable heights in the intervening years."

"Just as the government must be prudent in paying its employees, it must also not overpay contractors," it said. But shortly afterward, with the White House faulting Congress, the cap was raised from $693,951.

Two years ago, the cap was applied to all employees of defense contractors, not just the top five employees, and the budget proposed by the president this month says the administration is redoubling its efforts to lower the cap to the level of the vice president's salary, about $250,000, and to apply it to all employees of non-defense contractors as well.

Stan Soloway of the Professional Services Council, a contractors group, said it is the latter that causes them consternation.

"The issue we're most concerned about is expanding it to include all employees, because if I'm required to get really high-end technology or analytic skills, I can't get them on a government contract."

The limits on defense contractor pay don't have an effect because the cap is so high, but lowering the limits to $250,000 would have a visible effect, he said.

Mr. Amey said the issue is coming to a head because the cap has nearly doubled in recent years and because for public employees, "we're talking about reductions, furloughs, and everything else. Meanwhile if trends follow, the 2013 compensation cap is going to be higher than $800,000."

The Eyak Corp., an Alaska Native business that uses its minority status to get contracts and is the sole bidder for most, paid its top five executives nearly $4 million last year, including $1.1 million to Keith Gordaoff.

Eyak's Brennan Cain said by email that companies must be able to "pay compensation they deem necessary to competitively retain executive talent against their commercial counterparts." He said the proposed reforms mean little to his company because it pays its executives out of corporate profits and does not bill the government directly at all for executive salaries.

"The compensation limits being discussed relate only to cost reimbursement contracts," he said, not the contracts with which his company deals, which are "firm-fixed-priced revenues which are subject to the government's price reasonableness analyses."

The proposed cap is calibrated to major publicly traded companies with at least $50 million in annual revenue, but advocates such as Mr. Amey point out that many government contractors are much smaller.

Harper Construction Co. of San Diego has 120 employees and paid its top executives $3.5 million last year, including $1.1 million for David Golden. No companies other than Eyak would return calls about their executives' compensation, despite the reliance on taxpayer funds.

Truland Systems Corp., an electrical contractor that said last year it had annual revenue of $56 million and has received roughly $223 million in federal contracts since 2007, including work for the General Services Administration and the Department of Homeland Security, paid its top five executives $11 million, including $5.9 million to Robert Truland. For most of its contracts, it was the only bidder.

Propulsion Controls Engineering, another firm that gets more than 80 percent of its revenue from the government, had as few as 120 employees and revenue of $27 million in 2012, yet paid its top five executives nearly $8 million, including $3.6 million to David P. Clapp.

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