The burden of your story seems to be that the difference in compensation is the principal reason you are losing your top men and are not able to recruit those who would be top men later on. In your statement you deal with the caliber, and you point out that typically the really outstanding men in this field can earn two to four times as much in industry and more in a university when outside earnings were included.

Now do you think the increases embodied in this legislation would take care of that situation?

Mr. GILPATRIC. Again we will not be meeting competition, Mr. Davis; we will be offering enough more, however, above the present top levels, the $17,000, $18,000, $19,000

Mr. DAVIS. If a man is interested primarily in compensation, in the dollars, if a man can obtain two to four times as much in industry as the Government is able to offer him, he is not going to work for the Government. That would be the impression I get from your testi

mony.

Mr. GILPATRIC. I want to make it clear that while there are some people whose sole motivation will be the top earning power they can achieve in whatever their career turns out to be, there are many people and you are looking at some right here who have other motivations beside just dollars. However, they have financial needs and they have family obligations, and there is an area in there where I think you do not have to go all the way up to the very top levels a man could get in industry. You can offer him part of that, and coupled with the other motivations that bring a man into public life, into public affairs

Mr. DAVIS. Is not a great part of this trouble that we face due to the fact that the various Government agencies, including the Defense Department, have not paid enough attention to holding down the production costs, to holding down these people who get contracts with the Government, and in many instances who depend 100 percent for their income on Government contracts, that we have not paid enough attention to holding them down and preventing them from competing with Government agencies? As the Government increases compensation to Government employees they just simply raise their ante and take them away from the Government.

Mr. GILPATRIC. Mr. Davis, we have pretty strict controls. Maybe we have not administered them as carefully and as prudently as we might; but as I said in my statement, of the total $25 billion of procurement we put out every year now at the current rate of spending in Defense, about 42 percent is on cost-reimbursement-type contracts. That means that we have a control over what we are going to allow the contractor.

Mr. DAVIS. I know you have control over it, but it does not seem it has been exercised to any substantial extent.

Mr. GILPATRIC. I asked for some examples and I just this morning received five instances, six instances where the Navy has disallowed salaries because they were higher than the Navy felt, the Navy auditors who review these

Mr. DAVIS. How many examples?

Mr. GILPATRIC. I have six examples here that I just picked up this morning; one company where the president was claiming reimburse

ment for $40,000 salary. He was only allowed to put in for $25,000. This does not mean that his salary is cut. It means the difference between the $25,000 and $40,000 has to come out of his company's fee.

Mr. DAVIS. I understand what it means.

Mr. GILPATRIC. We pay for it, but it comes out of his profits, and if salaries are excessive among private contractors that results in reducing that profit. So there is a real discipline here, and I think complaints we get from industry are that we are too tough, that we have our sights set too low.

Mr. DAVIS. Of course you would expect that to be the attitude of industry under those circumstances. The thing to do is just set your course, base it on commonsense, and stick to it.

Do you actually think that we can compete with private industry in paying salaries to these people which you have been discussing this morning?

Mr. GILPATRIC. You can if you allow for this intangible factor, this motivation, this inducement, this incentive, this desire which accounts for the fact that you have in Government today so many able people even though they could earn more on the outside. I do not think we have to bridge the gap completely by going right up and making salaries absolutely comparable. I do not think it is either necessary or desirable, and that is why the President has stressed reasonable comparability. You have to be in the same ball park, but not on the same seat in the bleachers.

Mr. DAVIS. I do not want to take up all the time, but I think that there has got to be a spirit of cooperation between the Government and industry if this situation is to be taken care of, and I think that the Government is going to have to take into consideration the circumstances that industry faces and industry is going to have to take into consideration the circumstances which the Government faces. We cannot just keep this thing spiraling from now on and compete with industry and then have industry take our men away from us as they have been doing.

I realize what the problem is, and I am sure you do, but I think it is going to require more cooperation between industry and the Government than we have been having up to now.

Mr. GILPATRIC. In connection with Mr. Davis' question, Mr. Chairman, may I make part of the record, as illustrative of what I just said, a few instances of cases where we have disallowed substantial salaries on the ground that they were unreasonably high and should not be included in reimbursable cost paid by the Government under cost-reimbursement-type contracts.

Mr. MORRISON. Without objection, that will be filed. (The statement referred to follows:)

EXAMPLES OF SPECIFIC NAVY AUDIT DISAPPROVALS OF SALARIES UNDER NAVY

CONTRACTS

Company A.-The following shows the salaries claimed and those allowed by our auditors:

President_

Vice president....

Treasurer

Claimed $40,000

17, 200 14,000

Allowed $25,000

15, 000 12,000

84357-62-pt. 1- -13

Company B.-Salary allowance proposed by the contractor for the president of the company was $45,000; our auditors accepted $36,000.

Company C.-The salary of the president was established at $79,000; we allowed $65,000 and, in addition, disapproved a pension accrual of $1,535.

Company D.-This company is a partnership and the two principal partners claimed compensation at the combined rate of $104,000 per annum; i.e., $52,000 each. We allowed $60,000 or $30,000 each.

Company E.-This company claimed $25,000 salary for its executive vice president. We disallowed $22,500 of this amount because our auditors concluded that the individual involved devoted insufficient time to the business. It was found that two other officials of this same contractor had spent a considerable amount of their time in connection with the acquisition of a subsidiary. The combined salaries of these two individuals amounted to $31,580. We disapproved half of this amount, resulting in an allowance of $15,790.

Company F.-The combined compensation of two senior officials amounted to $39,000 of which $23,000 represented salaries and $16,000 represented bonuses. We limited the allowance to $30,000.

Mr. MORRISON. Mr. Gross?

Mr. GROSS. Mr. Gilpatric, it is particularly interesting to have you before the committee this morning. I believe you are one of the architects of the Aerospace Corp., is that not correct?

Mr. GILPATRIC. That is correct. I was asked by the Secretary of Defense and the Secretary of the Air Force 3 years ago to help set up the Aerospace Corp., and among those, curiously enough, who were associated with me, were Mr. Halaby, who is going to be before you today; Dr. Brown, who was a trustee; and Dr. Weisner.

Mr. GROSS. Mr. Halaby at one time recommended doubling of salaries of Government officials and Members of Congress.

Now as former chairman of the board of trustees of Aerospace Corp., can you tell us who requested that the Aerospace Corp. be established? That was the Department of Defense, was it not?

Mr. GILPATRIC. Department of Defense.

Mr. GROSS. And who?

Mr. GILPATRIC. The letter I got from the Department was signed by my predecessor, Mr. James Douglas, the Deputy Secretary of Defense, and was joined in by the Secretary of the Air Force, Mr. Douglas Sharpe.

Mr. GROSS. Do you know the salary of the president and vice president of Aerospace?

Mr. GILPATRIC. I certainly do.

Mr. GROSS. What is it?

Mr. GILPATRIC. The president, Dr. Ivan Getting, receives $75,000 a year, and I had a very difficult time getting him to leave the Raytheon. Corp., of which he was then vice president for engineering. He was earning and had been earning over a period of 5 years on the average of $125,000 a year. Dr. Getting is one of the outstanding scientists in this country in his field. He was one of the top paid officers of Raytheon, and when you take into account his bonus, profits on his option plans, and his salary, he was earning 40 percent more in his private job than he got from us.

The $75,000 salary which he is now being paid by Aerospace I am not sure it is all allowed on a cost reimbursable basis, but it is paid for by the Government in effect-that salary is less than that paid by the Space Technology Laboratory which had been doing the same job for the Air Force before Aerospace was formed, and to which the Congress, the Holifield committee and others, have objected because it

resulted in so much profit to STL. They wanted this put on a nonprofit basis. STL paid their top people more than Dr. Getting, so I have no apologies for recommending to the Air Force and to the board of trustees of Aerospace that Dr. Getting get $75,000 a year. That is a high salary. It is more than three times what I am getting in this job today.

Mr. GROSS. Aerospace Corp. is a 100-percent subsidized Government corporation, is it not?

Mr. GILPATRIC. It is a not-for-profit corporation. It gets all its business today from either the Department of Defense or NASA. Mr. GROSS. And you were instrumental in establishing the salary? Mr. GILPATRIC. I did that at the request of the Government, and I tried to get the best people possible.

Mr. GROSS. And you were instrumental in establishing the salary

scale?

Mr. GILPATRIC. Yes. It was submitted, however, to the then Secretary of the Air Force and the other officials of the Department of Defense. So we only did this with full knowledge of those concerned. Mr. MORRISON. What year was that?

Mr. GILPATRIC. This was about 1960, Mr. Chairman. Aerospace was established under the previous administration with the full knowledge and consent and at the instance of those who had the responsibilities that we have here now, because it was impossible for the Air Force to get the kind of service which it needed in its ballistic missiles and space programs without going to private industry and paying what Congress thought after investigations were made to be excessively high cost.

Now time alone will tell whether this was a wise move, but I personally believe, having been on both sides of it now-having been in the private sector and now in a position where I am responsible for what we pay Aerospace-I think we made a good deal.

Mr. GROSS. So without putting words in your mouth, it is safe to say that you believe that $75,000 a year salary of the president of the Aerospace Corp. is reasonable?

Mr. GILPATRIC. For this particular assignment, Mr. Gross, and this man is administering $50 million worth of Government-directed scientific research and technical direction systems engineering. He is responsible for some of the most important programs which the Air Force has today in satellites, in space technology, and I just do not believe you can get a man to do that job by paying him less. That is my best judgment.

Mr. GROSS. Let me ask you what the Secretary of Defense makes by way of salary.

Mr. GILPATRIC. $25,000.

Mr. GROSS. How does the salary of the president of Aerospace relate to that of the Secretary of Defense? We have heard a lot in the last few days about comparability. How would you compare them? Mr. GILPATRIC. Well, the Secretary of Defense, Mr. McNamara, left a $350,000-a-year salary. My salary today is about a sixth of what I was earning before I came down here. You are never going to get comparability in jobs like these.

Mr. GROSS. Then perhaps we ought to throw the word out of some of these discussions. Do you think defense contractors are the Government's strongest competitors for skilled talent?

Mr. GILPATRIC. I would not define the competition that narrowly, Mr. Gross. I think we have in this country in all areas, in universities and nonprofit corporations and private industry, a need for more talent of the highest order that is available. It is a supply and demand situation, and the supply is on the short side. A salary of $75,000 a year for a $50 million a year company is not out of line. I can assure you of that. It seems high to you and to me who are earning much less, but that is what the American industry is paying today in the free market.

Mr. GROSS. You have already commented briefly in response to the question from the gentleman from Georgia, Mr. Davis, on efforts to establish some kind of control over these 100 percent Government subsidized corporations such as Aerospace, but apparently-and I join with my colleague in his comment all too little has been done.

We have had hearings before our Manpower Utilization Subcommittee for several years now, and we have been trying to do something about this situation. When did you start to monitor these contracts and salaries being paid?

Mr. GILPATRIC. We have had in the Armed Services Procurement Regulations for many years, Mr. Gross, a set of regulations that call upon all the contracting officers in the service to review before, during and after performance of a cost reimbursement type contract, the contractor's pay scales, his fringe benefits, his whole compensation structure, and we have, as I indicated, been accused more often than not of being on the stingy, parsimonious side in our allowances.

Now, a few of these examples stand out like Dr. Getting's case in Aerospace because it is a large amount. It is way above any average or level, but that is a pretty rare case. Most of these examples that I put into the record here recently are of holding down allowances to $25,000 or $30,000 or less. We felt that was all the Government should pay of that particular salary, applying this reasonably comparable scale standard.

Mr. GROSS. With all respect to you, Mr. Gilpatric, your record in this matter is pretty well established in the establishment of Aerospace and the salaries being paid. Time does not permit going into the salaries paid to supervisory employees in Aerospace and so on and so forth, which are far above those in private industry, I am sure, for comparable positions.

With all due respect to you, if this is the attitude which you bespeak through your statement here this morning and in what you have had to say by way of this brief question and answer period, I do not look for very much help from the Department of Defense in properly monitoring the salaries being paid in private and nonprofit organizations that are wholly subsidized by the Federal Government.

Mr. GILPATRIC. Mr. Gross, I think I can convince you that I am worthy of being trusted with the administration of this kind of a program because I believe on the whole that our record is not as bad as you seem to believe, taking this one instance. Aerospace is a very special kind of a situation.