Is there guidance governing how this limit should be adjusted for executives who are not employed for an entire fiscal year? If an executive was only employed for three months, for example, should any compensation greater than 25% of the compensation limit be disallowed (assuming the compensation is otherwise reasonable and allocable)?
If by “guidance” you mean agency direction to its employees (vice federal statute or acquisition regulation) no such agency direction directly addressing your question was found. Still, to be noted, the Defense Contract Audit Agency (DCAA) in its Contract Audit Manual (CAM) does provide some guidance to DCAA auditors on computing and applying the statutory/regulatory compensation cap. The CAM guidance can be found on the internet at http://www.dcaa.mil/cam.html. Although the CAM does provide a fairly comprehensive summary of the changing (year-to-year) compensation cap requirements and may be illuminating, it does not directly address your question.
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As to your second question, the language of the cap imposing statute and implementing regulation may be determinative. Neither the language of the cap imposing statue nor the implementing acquisition regulation require annualizing partial year compensation, as you posed, in order to determine an allowable amount under the cap. There have been “caps” on allowability of executive compensation for almost two decades now. An executive compensation cap was first established in the DoD Appropriations Act for FY 1995 (Pub. L. No. 103-335) and implemented DFARS 231.205-6(a)(2).
Until government Fiscal Year 1998, the dollar value of the “cap” was adjusted each year by the appropriation statute and other details about the cap also varied somewhat depending on the statutory language utilized (i.e., what elements of remuneration were included in compensation for purposes of determining compensation subject to the cap and what contracts were subject to the cap.) For FY 1998, the Nation Defense Authorization Act (NDAA) established a more permanent cap the amount of which was to be established by the Administrator of OFPP based on an established formula. In early December of 2013, the OFPP announced that this cap for costs incurred after January 1, 2012 was $952, 308, this, apparently, being the cap you are referring to in your question.
The language of NDAA for 1998 (Public Law 105-85, Section 808) make “not allowable”—“such compensation” that “exceeds the benchmark compensation amount.” While FAR 31.205-6(p) provides that compensation “in excess of the benchmark compensation amount” [ ] “are unallowable.” In conclusion, neither the statute nor implementing regulation require anything other than making the unallowable the excess of applicable compensation in excess of the benchmark – no need to annualize.
As a side note, the current compensation cap addressed above appears to have been displaced with the passage of both the FY 2014 NDAA and the Bipartisan Budget Act (BBA) of 2013 in late December of 2013. In both statutes the statutory cap on executive compensation was changed significantly. While the 2014 NDAA (at § 811) provides that the “[c]osts of compensation of any contractor employee” [ ] that “exceeds $625,000” are unallowable, the BBA, signed by the President on the same day as the 2014 NDAA, at § 702 makes unallowable employee compensation in excess of $487,000 per federal fiscal year. The compensation cap is currently the subject of an open FAR case (# 2014-012)