2023 National Compensation Matrix: Say What?
Two years ago, after the 2021 National Compensation Matrix (NCM) was issued, we published a blog that referred to the release as a “whimper” because it was simply an update of the 2020 version. Last year was more of the same, where the 2022 NCM was just an update of the 2021 version using an escalation factor. No significant changes occurred. However, 2023 is the third year of this three-year cycle, and the 2023 NCM is not an update; it is now a new year, new data. Surveys were used to create and update this tool for 2023.
Since this new NCM should reflect compensation levels throughout the AE industry, looking at the actual results is appropriate. Since the last NCM updates were created using an escalation factor without real-time data, it would seem that this year’s version would give us some insight into how AE executive salaries are tracking “average” salaries.
To say we were surprised about the 2023 results is an understatement. The escalation factor for 2021 was 3.0%, and for 2022 was 3.8%; thus, the reasonable compensation levels seemed “reasonable.”
Before the 2023 release of the NCM, we used a 5.1% escalation factor, which came from the Bureau of Labor Statistics. Thus, the computed reasonable compensation for the President of a $10,000,000 engineering firm would calculate to $492,948 using a 5.1% escalation factor, which makes sense since the compensation using the NCM for 2022 was $469,028. The brand new 2023 NCM came out, and since many of our audits have yet to be issued, we chose to use the NCM numbers for reasonable compensation. WOW!
According to the 2023 NCM, the reasonable compensation for the President of a $10,000,000 AE firm is…….$448,304!
That amount is $20,724 less than the 2022 amount and a whopping $44,644 less than our computed number. Even using the escalation factor for the Bipartisan Budget Act (BBA) of 3.7%, the 2023 NCM number is $38,078 less.
I thought this had to be some error, so I computed reasonable compensation levels using the 2020, 2021, 2022, and 2023 NCMs for various positions with revenue numbers of $10,000,000, $20,000,000, and $30,000,000 for President, Executive Vice President, and Senior Vice President. The change between 2020 and 2021 and 2021 and 2022 were the same. For 2023 the change for President of a $10,000,000 firm was 4.4% LESS than in 2022, for the Executive Vice President of a $20,000,000 firm was 2.1% LESS than in 2022, and for the Senior Vice President of a $30,000,000 firm was 1.4% LESS than 2022.
Pretty amazing. The only winners I can see are executives over the BBA cap. Their reasonable compensation increased from $568,000 to $589,000, a 3.7% increase.
Are executive salaries for AE firms lower this year than last? As a matter of fact, the compensation for the President of a $10,000,000 firm this year is less than the 2021 amount. There are three possible reasons for what is going on.
First, I have always felt there was insufficient participation in salary surveys, and this year’s results may be a symptom. For the 2022 PSMJ survey (the last one published), only 266 firms participated. At SN, we have used PSMJ, Zweig, and Dietrich (now Pearl Meyer) salary surveys in the past, and the participation has been consistent over the years, with around 250 firms. So, tens of thousands of presidents are being limited in their compensation by 266 presidents; that is a problem.
The second issue is timing. This year’s NCM was published on March 16th and obviously did not contain the PSMJ data since it has not been published for this year. Which brings into question how many surveys were used for the NCM?
And third, I don’t believe firms participate in multiple surveys since they can be somewhat time-consuming. Thus, if four surveys are used, and each survey has 250 respondents, there may be 1,000 firms establishing reasonable compensation for the NCM, but this year PSMJ was not used, or the 2022 survey was used. Regardless, we’re working with minimal data.
What is the solution?
During our Government Contracting training program, I stress the need for firms to participate in salary surveys. Pick one and be consistent. The more firms that participate, the better the data will be. Regardless, the results of the NCM this year are shocking and will affect allowable overhead. Hopefully, the unallowable compensation over the reasonable limits based on the 2023 NCM won’t be enough to swing the overhead too much.
Please get in touch with me if you have questions about leveraging this year’s NCM or would like to discuss developing your FAR-allowable overhead rates.
And make plans to join us for our in-person FAR training courses this Fall. These two-day events are chock full of information, including the compensation matrix, proper compensation planning, and executive compensation under FAR.