Board Confirms Unallowability of Executive Compensation Based on Changes in Securities and Dividends Prices

May 31, 2017

In Exelis Inc. (ASBCA No. 58966, Mar. 29, 2017), the Board upheld the Government's disallowance of compensation paid under Exelis’ Long-Term Incentive Plan as expressly unallowable under FAR 31.205-6(i) and subject to level 1 penalties because it was “based on changes in the prices of corporate securities and dividends.” The amount of compensation was determined based on “total shareholder return” (TSR) using a formula that compared growth in the value of Exelis’ stock and dividends to other companies. The Board held that, “[a]s in Raytheon, the metric Exelis used to calculate and value the TSR compensation was TSR performance ratings, which were based on securities price changes and dividend payments.” The Board rejected Exelis’ argument that Raytheon could be distinguished because the TSR costs were “paid based upon a predetermined compensation award pool,” noting that “the plain language of the cost principle more broadly renders unallowable any compensation that is ‘calculated’ or ‘valued’ based upon‘changes in the price of corporate securities.”

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