Designing Military Pay

What should be the structure of military compensation for active-duty personnel? This broad question is the focus of the review of the economic literature presented in this report. The review addresses a more specific question, How should military basic pay be designed? Some of the key guidelines derived from the survey are that (1) individuals in occupations or positions with disamenities (e.g., greater injury/death/health risks) must receive higher pay than those in occupations with amenities; (2) compensation should rise with grade or with hierarchical level; (3) the intergrade compensation spread should increase with grade; (4) promotion policy can increase each individual's motivation and performance; (5) explicit up-or-out policies can sometimes be replaced by implicit up-or-out policies; (6) individuals have different abilities to perform different jobs; (7) compensation within a grade should be contingent on effort and/or performance; (8) the best matches between personnel and grades can be achieved by not motivating to move up in the ranks those who are relatively less able to perform the tasks associated with the higher grades; and (9) the pay gap across grades should be greater than the pay gap within a grade. The report points to aspects of the military that violate these guidelines and makes recommendations for future work to apply the findings.