Compensation Benchmarks for Winning Bids

by Malak Kazan, CECP, CCP, CBP, GRP 7. March 2016 12:26

 

Privately-owned and publicly-traded companies have lines of business dedicated to successfully participating in the bidding process initiated with a Request for Proposal (RFP) by a government entity. There are many criteria that companies need to satisfy in order to be awarded a government contract.  One is providing pricing that includes reasonable labor cost estimates that reflect the prevailing wage.  Companies deriving labor costs from current internal pay levels will generally have a practice of externally benchmarking the prevailing wage.  External compensation benchmarks will be specific to geography and industry, have a large sample size, report both the mean and median, and be matched to the job requirements.

The labor cost estimates for government contracts have been regulated through prevailing wage legislation beginning as early at 1931 with the Davis-Bacon Act of 1931, followed by the Walsh-Healy Public Contracts Act of 1936 and then the McNamara-O'Hara Service Contract Act of 1965 (for more information, see ERI Distance Learning Center course 15, Federal Employment Laws That Impact Compensation and Benefits).  ERI’s Salary Assessor (SA) and Executive Compensation Assessor (XA) provide non-executive and executive compensation analytics benchmarks for prevailing wage estimates.

Let’s look at an example from the Salary Assessor, customizing the criteria by geography, industry, and job level, which then generates a report that includes sample size with accompanying standard errors.  The criteria selected are Project Coordinator in the Aerospace Manufacturing industry in the Birmingham Alabama labor market.  The prevailing wage benchmark is displayed below.

Salary Assessor:  Median Prevailing Wage Benchmark

The job requirements for a project may vary, so it is essential to have a benchmarking tool that has the flexibility to submit labor costs that are aligned to the business opportunity.  Using the above table, you can pull many different compensation benchmarks:

  • Job requirement is entry level with 1 year of experience:  Estimate = $37,366
  • Job requirement is mastery skills level with 10 years of experience:  Estimate = $51,136
  • Job requirement does not specify years of experience:  Estimate = $47,035

Next let’s look at the associated reliability statistics for this benchmark.

Salary Assessor: Reliability Statistics

The associated reliability statistics for the Project Coordinator prevailing wage benchmark has 660 observations, with a standard error of 3.1% and a corresponding population error of 6.6%.  Although the geographic criteria selected used the city of Birmingham, the Area is defined as Birmingham-Hoover since ERI analyses have identified these adjacent cities as effectively part of the same labor market. That is, the demand and supply for labor in these cities is similar.

Similar analysis for executive jobs can be determined by the revenue scope of the executive’s role versus years of experience for the Project Coordinator example, a non-executive role. 

Executive Compensation Assessor: Chief Executive Officer (CEO)

The median base salary benchmark for CEO is $748,806 with a corresponding $1.3 billion revenue scope.  When the revenue scope is increased to $13 billion, the median base salary benchmark changes to $1,220,455; when decreased to $130 million, the median value is $456,663.

Next let’s look at the associated reliability statistics for this benchmark.

Executive Compensation Assessor: Reliability Statistics

The associated reliability statistics for the CEO prevailing wage benchmark has 340 observations, with a standard error of 4.5% and a corresponding population error of 9.6%.  The Area is also defined as Birmingham-Hoover, as noted earlier.

With executive compensation, in addition to the prevailing wage, the concept of maximum reasonable compensation may also factor into the labor cost estimates for executive employees included in a government contract bid.  In the IRS determination of reasonable compensation, one of the main considerations is that of comparable wages.  Maximum reasonable compensation is the highest amount of compensation (both wages and bonus) allowed to be used as a business expense for services rendered in comparable circumstances.  Depending on the final executive cost of labor estimate submitted, it may be good practice to evaluate the maximum reasonable benchmark.  This benchmark is also available in ERI’s Executive Compensation Assessor

Let’s review a maximum reasonable compensation benchmark building on the current CEO example.

Executive Compensation Assessor: Maximum Reasonable Estimate

Based on this maximum reasonable compensation benchmark, you want to bid the CEO labor cost associated with the $748,000 to $3.36 million range.  Since it is likely that the CEO will not dedicate 100% time to a single contract, the labor estimates would be based on the amount of time spent derived by hourly rates (the annual rate divided by 2080 annual hours).  The annual compensation range above is equivalent to $360/hour to $1,615/hour.  (For more information see ERI Distance Learning Center course 12, IRS Reasonable Executive Compensation.)

Summary 

Partnering with an established data partner that provides a reliable source of external compensation benchmarks for prevailing wage can be invaluable.  Private sector organizations that have business units dedicated to government sectors clients have to submit winning bids to compete with top tier firms.  Having the most robust data source for including reasonable labor cost estimates validated with external compensation benchmarks can give you a competitive advantage.  For more information about compensation benchmarking, call our “best in class” service team at or visit www.erieri.com.