Taxpayers are Subsidizing Soaring CEO Pay at Pentagon Contractors

This week the House is expected to vote on the National Defense Authorization Act. While progressive lawmakers are attempting to rein in military spending, the bill could actually increase the Pentagon budget, perpetuating the misguided “War on Terror” at a time of urgent real security needs. Through this legislation, taxpayers will also be subsidizing obscenely large CEO paychecks at top Pentagon contractors.

More than half of the $14 trillion in Pentagon spending since 9/11, or $7 trillion, has gone to for-profit contractors according to a recent study by our colleagues at the National Priorities Project at the Institute for Policy Studies. The chief executives of these contracting companies typically pocket paychecks that dwarf the salaries of the U.S. president and military generals.

In 2020, the 20 publicly held U.S. firms that received the most lucrative Pentagon contracts paid their CEOs an average of $17.7 million. Department of Defense contracts to these 20 firms totaled $210 billion last year. Many of the companies get huge proportions of their revenues from federal tax dollars. In 2018, the top Pentagon contractor, Lockheed Martin, got 70 percent of its revenues from the federal government.

The U.S. government does impose limits on the amounts contractors can directly bill Uncle Sam for the expense of executive compensation. A 2013 budget deal lowered the allowable reimbursement limit from $952,000 to $487,000 per executive, with yearly cost-of-living adjustments. But this policy has not reduced the windfalls that government contracts generate for top executives. Most executive compensation today is in the form of stock options and other stock-based pay. Thus, to the extent that government contracts boost profits and share prices, they continue to drive contractor CEO pay up into the stratosphere.

And the “War on Terror” has driven these stock prices ever higher. An investigation by The Intercept showed that $10,000 in stocks for the top five Pentagon contractors purchased at the start of the war in Afghanistan would be worth $100,000 today.

Taxpayers should not have to subsidize sky-high compensation levels for military contractor CEOs that perpetuate the profit motive for war.

What can be done to rein in excessive pay at the top of Pentagon contractors?

The Patriotic Corporations Act, championed by Rep. Jan Schakowsky, would use the power of the public purse to encourage more reasonable CEO pay. The bill would give extra points in federal bidding contests to companies that have a pay ratio between their highest-paid executive and their median worker of no more than 100 to 1. In 2020, just three of the top 20 Pentagon contractors fell below that threshold. The bill also includes a wide array of additional provisions aimed at using federal contracting power to lift up workers and reduce economic, racial, and gender inequality.

This week Schakowsky offered an amendment to the National Defense Authorization Act based on the Patriotic Corporations Act. Unfortunately, in the legislative flurry (this was number 851 of 859 proposed amendments), her recommendation got dropped from this “must-pass” bipartisan bill. And since new contracting standards have limited fiscal impact, the proposal is unlikely to be included in the broader Democrats-only budget reconciliation act currently under negotiation.

But the executive branch has considerable authority of its own to impose conditions on federal contractors. In fact, President Biden has already used executive action to require contractors to pay their employees a minimum of $15 per hour. He should build on this progress by introducing new standards to rein in pay at the top end.

Additional amendments to the Pentagon budget bill offered by Schakowsky and other House Democrats could help curtail excessive executive pay at military contractors through other means. For example, several proposals address the revolving door between the Pentagon and private contractors. Former defense officials often parlay their military experience into highly paid jobs in the private sector where they use their influence to help secure contracts and influence policy.

And proposals to shrink the overall military budget, such as those introduced by Representatives Mark Pocan (D-WI) and Barbara Lee (D-CA), could make defense contracting less lucrative for corporate executives.

Under existing law, the U.S. government denies contracts to companies that discriminate by race and gender in their employment practices. Our tax dollars, Americans believe, should not subsidize racial or gender inequality. Our tax dollars should also not subsidize companies that increase economic inequality.