Setting Military Compensation to Support Recruitment, Retention, and Performance

by Beth J. Asch

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Research Questions

  1. What is a competitive level of military pay? What should the annual pay raise be?
  2. How should military pay be structured across and within ranks to enhance talent management? How should entry pay be set? How much should pay increase when a member is promoted? How should this increase change as a member moves up the ranks?
  3. How much should be put into basic pay received by all personnel and how much into special and incentive pays?
  4. What is the purpose of the retirement system? What problems does the new Blended Retirement System solve? What concerns are there about this new system?

Military compensation has the dual role of recompensing members for their service and assisting the services in meeting their readiness objectives, including attracting and retaining personnel; motivating effort; inducing members to sort to the ranks, positions, and jobs for which they are best suited; and eventually separating personnel at the end of their career. Drawing on a large body of research, this RAND Arroyo Center report, part of a series on a common theme, describes the role of military compensation as a strategic human resource tool. The author also reviews how well compensation works in this capacity and how it could be improved. Specifically, the report examines issues related to the level and growth of military pay, the structure of the basic pay table, the role of special and incentive pays, and the structure of the military retirement system, especially the new Blended Retirement System. Key recommendations include reevaluating the pay-adjustment mechanism; considering increasing performance incentives embedded in the pay table; improving the setting of special and incentive pays to increase pay flexibility, efficiency, and performance incentives; ensuring that the continuation pay under the Blended Retirement System is set appropriately for officers; increasing the efficiency of the retirement system by reforming the accrual charge system; and recognizing that changes to legislation to improve officer management flexibility should also consider whether and how military compensation should change.

Key Findings

  • In recent years, military pay has exceeded the 70th percentile for both officers and enlisted, raising the question of whether military pay is set too high relative to civilian pay.
  • The Employment Cost Index is used to guide the annual military pay raise, but recently it did not track well with the opportunity wages or perform well in terms of tracking force-management outcomes.
  • The Army did not increase recruit aptitude as military and civilian pay rose in recent years.
  • The officer pay table appears compressed, possibly dulling financial incentives for performance. Nonetheless, whether the pay table is structured appropriately for officers ultimately comes down to whether the Army and the other services are satisfied with the officer performance.
  • The primary source of flexibility and efficiency in the military compensation system turns out to be only a small fraction of cash compensation. Special and incentive pays are not as efficient as they could be in providing incentives for retention and performance.
  • Research shows that the Blended Retirement System could sustain retention for officers and for enlisted personnel relative to the legacy retirement system, but only if continuation pay multipliers are set appropriately. The Army's policy of setting the multiplier at the Congressionally mandated minimum of 2.5 for officers is predicted to create long-run retention problems.
  • The military retirement system is funded on an accrual basis, but the current methodology for computing the accrual rate results in inaccurate budget estimates and incorrect incentives for making defense resource decisions.

Recommendations

  • Assess whether the 70th percentile of the civilian pay for civilians with similar characteristics to military personnel continues to be the right benchmark for setting the level of military pay.
  • Reevaluate the pay-adjustment mechanism; reassess the Employment Cost Index as well as other options, including the Defense Employment Cost Index with more-recent data.
  • Consider increasing performance incentives embedded in the pay table—including the possibility of a time-in-grade pay table—to address compression in the officer pay structure and to increase incentives associated with promotion.
  • Improve how special and incentive pays are set to increase flexibility and efficiency.
  • Ensure that continuation pay, part of the new Blended Retirement System, is set at the right level.
  • Consider opening another opt-in window to permit members to choose the new Blended Retirement System, given that opt-in rates were relatively low in 2018, including for the Army.
  • Reform the retirement accrual system to make it different for officers and enlisted members and by service.
  • Consider ways to use compensation to induce more volunteerism and greater efficiency of compensation within the Army.
  • Recognize that changes to the Defense Officer Personnel Management Act to improve management flexibility should also consider whether and how military compensation should change.

Research conducted by

The research described in this report was sponsored by the United States Army and conducted by the Personnel, Training, and Health Program within the RAND Arroyo Center.

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