The Salary Ceiling: Why the Government Won’t Reimburse All of an Executive’s Pay

Published 2026 | TIKC NewsWire

Here is a rule that surprises a lot of growing contractors. You are free to pay yourself and your executives whatever your business can afford. But when you work on cost-reimbursement government contracts, the government will only reimburse executive compensation up to a set ceiling. Pay above that line is your choice to make, but you cannot bill the excess to the government. When contractors do not know the cap exists, they load full executive salaries into their rates and quietly claim costs the government was never going to allow.

Why a cap exists at all

On a cost-type contract, the government reimburses your allowable costs, including compensation. Left unchecked, that could mean taxpayers funding unlimited executive pay. So there is a benchmark compensation limit: a maximum amount of an individual’s compensation that can be charged to government contracts as an allowable cost. Above that number, the pay is simply unallowable. It is not a judgment about whether your executives are worth it. It is a ceiling on how much of their pay the government will share.

Where it hides in your rates

The trap is indirect. Executive salaries usually flow into your overhead or general and administrative pool, which then spreads across your contracts as a rate. If the full, uncapped salaries sit in that pool, every government contract you bill is quietly carrying a piece of unallowable cost. You may never write a line item that says “CEO salary.” It is buried in a rate, which is exactly where an auditor goes looking. The cost is unallowable whether it is obvious or hidden.

Cap it before it hits the government

The clean way to handle this is to cap the compensation in your cost pools before you ever build a rate. You keep paying your people what you decide, but for government billing purposes, you only carry each person’s pay up to the allowable ceiling. The excess stays off the government’s tab. This is the same screening discipline that keeps expressly unallowable costs out of your rates: decide what the government can and cannot be charged for, and pull the rest out before you bill.

What to do now

• Know the ceiling applies. Understand that cost-type contracts limit how much executive pay is reimbursable, regardless of what you actually pay.
• Find the pay in your pools. Locate where executive compensation sits in your overhead and G&A, because that is where it spreads to contracts.
• Cap before you bill. Carry only the allowable amount of each person’s compensation into the rates you charge the government.
• Keep paying what you choose. Pay your executives freely; just keep the excess above the ceiling off government billing.
• Document the adjustment. Show how you limited compensation to the cap, so an auditor sees a working control.

The compensation cap is not the government telling you what to pay your team. It is telling you how much of that pay it will share. The contractors who get burned are the ones who never knew the line was there and billed straight through it. Know the ceiling, find the pay in your pools, and cap it before you build your rates, and executive salaries stay your decision instead of an audit finding. Brick by brick.

FAQ

Does the cap limit what I can pay my executives?

No. You can pay your executives whatever your business decides. The cap only limits how much of that compensation the government will reimburse as an allowable cost on cost-type contracts.

What is the benchmark compensation limit?

It is the maximum amount of an individual’s compensation that can be charged to government contracts as an allowable cost. Compensation above that benchmark is unallowable for government billing purposes.

How does this reach my contracts if I never bill a salary directly?

Executive pay usually sits in overhead or G&A pools that spread across your contracts as a rate. If uncapped salaries are in those pools, every contract you bill carries some unallowable cost, buried in the rate.

Does this apply to fixed-price work?

The compensation ceiling is a cost-allowability rule, so it bites when you bill costs or rates to the government. If your pricing and billing depend on reimbursable costs, you need to apply the cap.

Sources

Federal Acquisition Regulation. (2026). 31.205-6, Compensation for Personal Services, and the benchmark compensation limitation.

Office of Federal Procurement Policy. (2026). Allowable cost limit on contractor compensation.

This article is general information, not legal advice.