Cover: A Wage Differential Approach to Managing Special and Incentive Pay

A Wage Differential Approach to Managing Special and Incentive Pay

Published Jan 7, 2019

by James Hosek, Michael G. Mattock, Beth J. Asch

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Research Questions

  1. What are the existing special and incentive (S&I) pays, and which of them would be good candidates for a wage differential?
  2. What are examples of how a wage differential might be implemented?
  3. Should S&I pays that include an incentive to select a longer military obligation be included in a wage differential?
  4. Should S&I pays that are conditional on military circumstances or supply-and-demand conditions be included in a wage differential?
  5. If such pays were included in a wage differential, what would the gain be to the servicemember?

Special and incentive (S&I) pays allow the Department of Defense to address temporary personnel fluctuations, persistent differences between external pay and regular military compensation, personnel requirements for retention, and variations in external employment opportunities. The authors review Active Component S&I pays and assess the potential for converting some of them into a wage differential, under which such pays would be disbursed according to a stable schedule that could depend on occupation or duty, years of service, and pay grade, a possible advantage to which would be to provide greater stability in pay. They find that a large portion of total S&I pays are already akin to a wage differential, and note that if servicemembers are averse to pay uncertainty, it is more cost-effective to compensate for difficult-to-predict circumstances such as hostile deployment or variation in unemployment with S&I pays that are conditional on the realization of such circumstances rather than on an ex ante basis, as would be the case under a wage differential approach. Additionally, converting these pays to a wage differential would deprive the services of flexibility in responding to certain circumstances. Using RAND's dynamic retention model, they find that S&I pays with an incentive to select a longer obligation are more cost-effective and may be more beneficial than pays without such incentive, as would be the case under a wage differential.

Key Findings

  • A number of special and incentive (S&I) pays (e.g., occupational pays and hazardous duty pays) already have features akin to a wage differential.
  • Incentives to select a longer military obligation contribute to the cost-effectiveness of S&I pays, and eliminating these incentives, as would be done under a wage differential, would decrease cost-effectiveness.
  • In the presence of risk aversion, it is cost-effective to compensate for uncertain circumstances such as hostile deployment and variation in supply-and-demand conditions by disbursing S&I pays when the circumstances are realized rather than on a continuous, scheduled basis, as would be done under a wage differential.
  • Even if it were desirable to convert such pays into a wage differential, the value to the servicemember in eliminating uncertainty in pay appears to be small.

Recommendations

  • In the presence of risk aversion, it is cost-effective to compensate for uncertain circumstances such as hostile deployment and variation in supply-and-demand conditions by disbursing special and incentive (S&I) pays when the circumstances are realized rather than on a continuous, scheduled basis, as would be done under a wage differential.
  • Incentives to select a longer military obligation contribute to the cost-effectiveness of S&I pays, and S&I pays with such incentives are more cost-effective and may be more beneficial than pays without them; eliminating these incentives, as would be done under a wage differential, would decrease cost-effectiveness.
  • With a wage differential, the value to the servicemember in eliminating uncertainty in pay appears to be small; there thus appears to be no real benefit to enacting a wage differential.

The research was sponsored by the Office of the Under Secretary of Defense for Personnel and Readiness, conducted within the Forces and Resources Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the U.S. Navy, the U.S. Marine Corps, the defense agencies, and the defense intelligence community.

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